GEOPOLITICS OF GAS[INDEX] · 4 The Geopolitics of Gas: Common Pr oblems, Disparate Strategies Until...

THE GEOPOLITICS OF GAS

Common Problems, Disparate Strategies

THE GEOPOLITICS OF GASCommon Problems, Disparate Strategies

Shebonti Ray Dadwal

INSTITUTE FOR DEFENCE STUDIES & ANALYSESNEW DELHI

P E N T A G O NP E N T A G O NP E N T A G O NP E N T A G O NP E N T A G O N P R E S SP R E S SP R E S SP R E S SP R E S S

The Geopolitics of Gas: Common Problems, Disparate Strategies

Shebonti Ray Dadwal

First Published in 2017

Copyright © Institute for Defence Studies and Analyses, New Delhi

ISBN 978-81-8274-900-9

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CONTENTS

1. The Problem of Plenty 1Natural Gas Trajectory 3

Changing Trends in the Gas Market 6

LNG as a Harbinger for Change 9

Growing Geopolitics 12The United States of America 13Russia 14West Asia (Iran, Qatar) 16Turkmenistan 17Australia 18Arctic 19China 20India 22

What Lies Ahead? 23

2. The United States of America – The Game Changer 25A Gas-Based Resurgence 27

The ‘Revolution’ 29

Strategic Benefits of US Gas Exports 30

Opportunities and Challenges for US Gas Exports 33

Can LNG Exports Achieve US Geopolitical Strategic Goals? 36

Impact of Energy Independence on US Foreign Policy 38

3. Russia – Master of the (Energy) Game 43The Russian Gas Sector 45

Natural Gas Exports as a Strategic Tool 47

Policies to Retain Markets 49

Diversifying Markets 52Europe Still a Coveted Market 52Seeking an Asian Market 56Caspian Reserves 58Exports to South Asian Markets 61

Challenge to Retain Leadership 63

The Geopolitics of Gas: Common Problems, Disparate Strategiesvi

4. Iran Re-emerges as a Potential Gas Superpower 66Background 67

Potential Gas Superpower? 70

Market Options 73Europe 73West Asia 75

The South Asian Market 77

The Challenges 81

5. Qatar – LNG Leader, But for How Long? 88Qatar’s Energy Policy 90

Regional Policy 92

Energy as Strategic Tool for Foreign Policy 95

Impact of a Changing Gas Market 97

Qatar’s Options 101

Future Challenges for Qatar 103

6. Turkmenistan – The Old Newcomer 108The Russian Bearhug 110

Turning Towards China 112

The Search for New Markets – South Asia 115

To Europe 118

Ashgabat’s Quandary 124

7. Arctic – The Last Gas Frontier 126Russia Raising its Stakes 128

The US Turns to the Arctic 131

Growing Militarisation 133

China’s Arctic Strategy 135

India’s Interests 137

A New Great Game? 141

8. China – The Market Driver 145China’s Gas Procurement Strategy 148

Overseas Asset Acquisitions 149Pipeline Strategy 150LNG Imports 154

China’s Shale Gas Policy 156

Offshore Disputes 159The South China Sea 159East China Sea 160

Strategising Supplies 160

Contents vii

9. India – A Legacy of Wasted Opportunities 163Challenges for India’s Gas Sector 164

A Curious Pricing Regime 165Low Production 168Equity Assets 171Poor Domestic Gas Infrastructure 172

Transnational Pipeline(s) Woes 175Unconventional Gas 178

Can the Inconsistencies be Overcome? 181

10. What Lies Ahead for Gas in the Future? 184Geopolitics Versus Price 185

Changing Market Dynamics 189

Moving Towards a More Integrated Gas Market 191

Index 199

1THE PROBLEM OF PLENTY

In 2000, in an interview with The Telegraph, the iconic former Saudi oil

minister Sheikh Ahmed-Zaki Yamani had predicted, “Thirty years from

now there will be a huge amount of oil and no buyers. Oil will be left

in the ground. The Stone Age came to an end, not because we had a

lack of stones, and the oil age will come to an end not because we have

a lack of oil.”1 At the time, there were not too many takers for Sheikh

Yamani’s prognosis. But less than two decades later, his predictions

appear almost prescient. As climate change concerns have seen a new

determination by several nations to replace “dirty” hydrocarbons with

cleaner fuels, dire predictions of renewable energy resources (solar and

wind in particular) and nuclear energy replacing oil, gas and coal are

making the rounds. Adding to the debate is the fact that over the last

decade, the prices of renewables have plunged, signalling that the time

lag between the transition from fossil fuels to renewable energy may

be shorter than earlier expected.

This raises the question whether the end of the hydrocarbon era is

nearer than anticipated. Not yet, if the International Energy Agency’s

(IEA) World Energy Outlook 2016 bears out. According to its November

2016 publication, the era of fossil fuels is far from over, although it

1. ”Sheikh Yamani predicts price crash as age of oil ends”, The Telegraph, June 25,2000 at http://www.telegraph.co.uk/news/uknews/1344832/Sheikh-Yamani-predicts-price-crash-as-age-of-oil-ends.html

The Geopolitics of Gas: Common Problems, Disparate Strategies2

does state that renewables have and will continue to see the largest

growth in demand across the globe. But the IEA also says that natural

gas, which also belongs to the hydrocarbon family, is projected to be

a “big winner(s)” till 2040, and that it is expanding its role at the cost

of coal and oil.2 In the US, for instance, natural gas is also replacing

nuclear- powered plants that are being phased out.3

Given that natural gas is a fossil fuel, why is its share of the global

energy basket increasing, when most countries are attempting to move

towards non-carbon emitting energy resources?

While oil dominated, and continues to be the fuel of choice for the

transport sector, coal was the predominant fuel for the power sector.

Natural gas, a latecomer in the hydrocarbon family, can be a substitute

for both oil and coal, due to its lower carbon-emitting properties.

Hence, in a world that is increasingly becoming more concerned with

the impact of climate change, natural gas is seen as a less polluting

option.

Second, countries usually take decisions about energy choices based

on resource availability, and in this respect, natural gas is far ahead of

both oil and coal, thereby contributing to the energy security of nations.

Speaking about the future of natural gas, the executive director of the

IEA, Dr Fatih Birol says that there are good reasons to be upbeat about

the future for natural gas due to “its relative abundance, its

environmental advantages compared with other fossil fuels, and the

flexibility and adaptability that make it a valuable component of a

gradually decarbonising electricity and energy system.”4

Third, apart from availability, the price of fuels are, more often than

not, a major determinant in opting for a particular energy resource. In

fact, that was one of the reasons why coal and oil were preferred by

many countries over natural gas. Hence from the second half of 2014,

2. “World Energy Outlook 2016 sees broad transformations in the global energylandscape”, World Energy Outlook 2016, International Energy Agency November2016 at http://www.iea.org/newsroom/news/2016/november/world-energy-outlook-2016.html

3. James Conca, “Natural Gas — Not Renewables — Is Replacing Nuclear Power”,Forbes, May 16, 2016 at http://www.forbes.com/sites/jamesconca/2016/05/16/natural-gas-is-replacing-nuclear-power-not-renewables/#399022764abb

4. See Note 2, World Energy Outlook 2016

The Problem of Plenty 3

when the price of natural gas dropped drastically for reasons that will

be explained later, it appeared logical that the time for gas to outshine

its hydrocarbon cousins had come. In fact, prior to that, in its 2011 World

Energy Outlook, the IEA had brought out a special report titled Are we

entering the Golden Age of Gas? wherein a rather optimistic picture of

the gas market was painted.

However, since 2014, that optimism has abated considerably.

Despite the abundance of supplies that have flooded the gas market

following the shale gas revolution in the US, there are few takers for

a variety of reasons. First, the price fall makes it difficult for producers

to recover the huge capital costs required for gas infrastructure, both

for liquefied natural gas (LNG) as well as pipelines, particularly those

involving cross-border projects. Third, the recovery in global economic

activity in many parts of the developed world, which are the largest

consumers of gas, has been more modest and uneven than anticipated.

Fourth, in some countries (notably China), which were seen to be major

drivers for it – the demand for gas has not gathered pace due to the

economic slowdown in that country. And lastly, the pace of increase

in growth for renewable energy, both for climate change factors as well

as more technological initiatives, have made them more competitive

vis-à-vis other fuels)

Nevertheless, there is hope that the demand for natural gas will

pick up, albeit later than was forecast, as it is the most suitable as a

transition fuel between the age of fossil fuels and clean energy.

Natural Gas Trajectory

The Chinese are believed to have been the first to discover how to use

natural gas in 500 BC, when they used gas seeping to the surface to

form crude pipelines out of bamboo shoots to transport the gas, which

was used to boil sea water to separate salt. However, it was Great

Britain that was the first country to commercialise the use of natural

gas in 1785, when natural gas produced from coal was used to light

houses, as well as streetlights.5

5. Natural Gas: History, Natural Gas.Org at http://naturalgas.org/overview/history/


Until the 1990s, natural gas was by and large perceived as a by-

product of oil fields, with no market and used for re-injection into oil

fields to increase production, flared or neglected. As a result, since the

end of the First World War and for most of the 20th century, oil was the

prevailing energy resource that dominated the energy security

discourse, over which many a battle has been fought. But over the last

decade-and-a half, with concerns of global warming and climate

change increasing, and the linkages between the use of hydrocarbons,

particularly oil and coal, and carbon emissions, the search for cleaner

fuels has gained ground. Given that renewable energy resources are

not commercially competitive vis-à-vis hydrocarbons and are not likely

to provide the volumes required to satisfy demand, natural gas, despite

being a fossil fuel, was seen as the best choice to bridge the gap between

dirty fossil fuels and renewable energy, making it an ideal “bridge”

fuel. Furthermore, with opposition to nuclear energy growing

following the Fukushima Daiichi disaster, much of the demand for

power from nuclear energy was expected to be replaced with natural

gas.

Other factors that favour natural gas over other fossil fuels include

facts such as natural gas is more widely dispersed geographically than

oil or coal. With reserves that are more geographically dispersed than

oil, gas is more abundantly available, much of which can be developed

and produced at relatively low cost, the total recoverable reserves of

gas are projected to sustain current production for over 250 years, with

all regions having recoverable resources equal to at least 75 years of

current consumption.6 According to the IEA, the estimated remaining

technically recoverable natural gas resources is around 752 trillion cubic

metres (tcm), while the BP states that global gas supply is expected to

grow by 1.9 percent per annum or 172 billion cu feet a day (bcf/d) or

4.8 bcm/day, to reach a total of 497 bcf/d (14.07 bcm/d) by 2035, that

is from 21 percent in 2010 to 25 percent by 2035.7 (see graph) At the

6. “Are we entering a golden age of gas?”, World Energy Outlook 2011 SpecialReport Factsheet, International Energy Agency, 2011 at http://www.worldenergyoutlook.org/media/weowebsite/2011/WEO2011_GAG_FactSheet.pdf

7. BP Energy Outlook 2035, January 2014 at http://www.bp.com/content/dam/bp/pdf/Energy-economics/Energy-Outlook/Energy_Outlook_2035_booklet.pdf


same time, “unconventional” supplies of natural gas, including shale

gas, tight gas and coalbed methane (CBM) have been growing steadily

for decades, roughly tripling the resource base that can be economically

recovered.8 Since natural gas resources can be produced from all the

volumes of rocks that contain oil as well from tight sandstones, shales

and coals that contain no oil. Hence, the global volumes of sediments

capable of producing natural gas commercially are at least twice and

probably closer to several times the volumes of rocks capable of oil

production.

Second, despite being a fossil fuel, gas is a cleaner burning fuel

than either coal or oil, and emits around 40 percent lower than coal

plants, while new gas power plants emit 66 percent lower carbon than

existing coal-based plants because of their higher efficiency levels.

Similarly, in the transport sector, many countries are opting for gas-

(compressed natural gas or CNG) powered vehicles, driven by rising

8. “Global LNG: Will new demand and new supply mean new pricing?”, Ernst& Young, 2013 at http://www.ey.com/Publication/vwLUAssets/Global_LNG_New_pricing_ahead/$FILE/Global_LNG_New_ pricing_ahead_DW0240.pdf


air pollution. Interestingly, in March 2014, Royal Dutch Shell also

announced that it had started selling a premium motor oil that is

derived from natural gas, instead of the traditional crude oil. Around

40 percent less carbon than coal as a fuel is used in the power sector.

Hence, for countries that are looking to reduce their emissions, gas is

the preferred choice of fuel. Moreover, gas is a far more versatile fuel

than oil or coal. Apart from being used in the power, residential and

industrial sectors, it is now being seen as a cleaner alternative in the

transport sector. Hence in a situation where 27 percent of energy was

being consumed in the transport sector, which was dominated by oil

at 93 percent, a switch to natural gas, in the form of compressed natural

gas (CNG) or LNG would involve a massive jump in demand. This is

being seen in several cases with the growth in natural gas-fuelled

vehicles witnessing a jump of 23 percent between 2001 and 2011.9

Although nuclear and renewable energy are cleaner than

hydrocarbons, they are not cost- competitive when compared to fossil

fuels; moreover, they cannot provide the volumes required to meet

galloping demand in the emerging economies. Natural gas being a

relatively cleaner fuel than coal and oil, is therefore attractive as a

“bridge” fuel before renewable energy can compete with fossil fuels.

Finally, unlike oil, which is a fungible commodity with a global

benchmark price, and hence vulnerable to price volatility due to

disruptions in production or supplies,10 the gas market is structured

differently and therefore less prone to disruptions.

Changing Trends in the Gas Market

Unlike the oil market, which is global in nature, the gas market is

fragmented and largely regional, with inter-regional gas trade

comprising only 30 percent of global gas consumption. The three main

markets are the North American market, the European (EU) market

and the Asian market, which is dominated by LNG.

9. Chris Le Fevre, “The Prospects for Natural Gas as a Transport fuel in Europe”,The Oxford Institute for Energy Studies, OIES Paper: NG 84, March 2014 athttp://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/03/NG-84.pdf

10. Geoffrey Kemp, “The Challenge of Iran for US and European Policy”, in RichardHaas (ed.), Transatlantic Tensions: The United States, Europe, and Problem Countries,Brookings Institution Press, December 2010, p.62.


Being regional in nature, the pricing of the gas varies from region-

to-region. For example, the North American pricing mechanism is tied

to the price of natural gas quoted at Henry Hub (HH), whereas

European gas pricing is largely based on oil product prices. However,

gas in Europe is also traded in other exchanges, albeit virtual in nature

as against the physical trading hub in the US (HH), such as the UK’s

National Balancing Point (NBP), the Netherlands’ Title Transfer Facility

(TTF), and Belgium’s Zeebrugge Hub. Nevertheless, only 34.8-37.7

percent of Europe’s gas supplies are priced off spot markets, as Russia,

a major and largest supplier of gas to European markets, insists on

trading gas based on oil-indexed contracts, on the ground that stable

oil-indexed gas prices were necessary to fund capital-intensive

exploration and production projects. Moreover, according to Gazprom,

Russia’s largest gas company, hubs are not sufficiently liquid to

generate any meaningful price signals and that producers should not

be burdened with both the pricing and the reservoir risk, given that

although the production costs of gas and oil are similar, gas costs about

30 times more to store and transport than oil. Hence, gas importers

cannot avail of the benefits of supply security and flexibility (in contract

pricing) while paying a lower hub price that reflects the value of only

the commodity.11

In the Asia-Pacific region too, gas prices are linked to crude oil,

known as the Japanese crude cocktail (JCC) which stands for Japanese

customs-cleared crude and is an average price of a basket of crude oils

that enter the Japanese market, which is the largest gas importer in

the region.12

The majority of gas trade is conducted between 10 to 30-year

contracts, with prices being generally adjusted on a quarterly basis,

and linked to the price of oil. These long contracts gave rise to rigidities,

as the buyer was required to pay for a specified minimum quantity of

gas at the contract price, irrespective of whether the gas was actually

utilised.

11. Nigel Harris, “Should Natural Gas Prices in Europe and Asia Be De-LinkedFrom Oil?”, The Oxford Princeton Programme, 2015 at https://www.oxfordprinceton.com/news/latest-news/338-should-natural-gas-prices-in-europe-and-asia-be-de-linked-from-oil.html

12. Roberto Aguilera, et al, “The Asia-Pacific Natural Gas Market: Large Enoughfor All?, Energy Policy, Vol.65, 2014, pp. 1-6.


Although the gas market has been evolving and changing over the

last decade or so, the factor that has hastened the process and brought

about immense changes in the outlook for gas was the introduction of

fracking technology in the US which led to a revolution in the gas –

and oil – sector. Due to the surge in gas production in North America,

the leading oil and gas consumer in the world, namely, the US, has

not only cut its oil and gas imports substantially, it is now poised to

become an exporter.

This surge in supplies has not only brought surplus gas in the

global market, it has also resulted in downward pressure on prices in

the US, which in turn is impacting on prices in non-American markets.

This rigid, regionally structured price regime is now gradually

changing, with both Europe and the Asian countries moving away from

oil-indexation towards more competitive gas-on-gas pricing. For

example, some companies are changing contracts which involve a

hybrid formula linking pricing to gas and oil, as opposed to linking

prices exclusively to oil. In 2012, the BG group reportedly concluded

a deal with China’s CNOOC, wherein 70 percent of the price was

linked to oil and the remainder linked to Henry Hub. Again, in 2012,

KOGAS and GAIL India signed 20 year contracts linked to HH prices

from Cheniere’s US-based Sabine Pass facility.13

Some of these changes were brought about due to various factors

including the rising price of oil, and forecasts that prices would remain

high in the foreseeable future for various reasons. Subsequently,

however, oil prices have decreased substantially, setting off a debate

whether gas prices should be de-linked from oil; the emergence of new

LNG markets in China, India, South East Asia, Latin America and West

Asia; the growth in Japanese gas demand following the Fukushima

nuclear accident and the government’s decision to cut back on nuclear

power, and replacing it with gas-based power; political turmoil in West

Asia, popularly called the “Arab Spring”, which curtailed exports from

some countries like Libya; the growth in LNG supplies and most

importantly, the shale revolution in North America, which freed up

13. Jane Nakano, Michelle Melton, “Coming Changes in the Asian LNG Market?”,CSIS, March 28, 2014 at http://csis.org/publication/coming-change-asian-lng-market


large contracts of LNG that were originally bound for the US market.

This, in turn, led to a fall in hub (Henry Hub) prices due to the

oversupply in the US market. Apart from the US, several new gas

producers have also entered the market. As a result, large quantities

of conventional gas is also emerging from a number of regions –

namely, Africa, the Mediterranean, Australia and the Arctic, added to

the global supply base. And finally, following the agreement between

Iran and P5+1 over the Iranian nuclear issue, the decades-old sanctions

that were imposed on Iran were lifted. Although the re-entry of Iranian

gas into the market will take a while given the state of the country’s

gas sector, it is expected that large supplies of Iranian gas will add to

the increasing gas pool in a few years.

LNG as a Harbinger for Change

Although pipelines dominate global gas trade at around 20 percent of

the total, LNG trade grew quickly in the late 1990s and 2000s. However,

from 2010 its share of the global gas trade has stabilised around 10

percent, although it has the highest growth rate of the gas supply

sources (which includes domestically produced and consumed

supplies), expanding at an average of 6.6 percent since 2000,14 with

some analysts stating that it now rivals iron ore as the world’s second-

biggest traded commodity, after oil. While the IEA forecasts that natural

gas demand globally would grow at about 1.6 percent per year through

2035, the growth in LNG demand is expected to be even stronger.

Although the first commercial liquefaction plant was built in 1964 in

Algeria, and growth was slow till 2000, since then, LNG’s growth

trajectory has been swift, with average annual growth of around 5-6

percent per year, albeit till 2020, when growth is expected to dip

slightly.15 This growth is based on the fact that more than 30 countries

14. “The World depends on Natural Gas”, IGU World Gas LNG Report, 2016 Editionat www.igu.org/sites/default/.../IGU-World%20LNG%20Report-2015%20Edition.pdf

15. International Energy Agency, World Energy Outlook 2012, October 2012 at https://www.iea.org/media/workshops/2012/energyefficiencyfinance/1aBirol.pdf,and “Global LNG: Will new demand and new supply mean new pricing?”,Ernst & Young, 2013 at http://www.ey.com/Publication/vwLUAssets/Global_LNG_New_pricing_ahead/$FILE/Global_LNG_New_pricing_ahead_DW0240.pdf


have proposed plans to build or add LNG liquefaction capacity, many

of them being newcomers to the LNG market.

At present, the largest consumers of LNG are Asian countries,

namely, Japan, South Korea and Taiwan, respectively. An exception is

China, as it imports gas via pipelines from Central Asia and Myanmar,

and is poised to import large quantities from Russia. Due to the lack

of overland contiguity, there was a high level of dependency of most

Asian countries on LNG imports. Traditionally, LNG in Asia is priced

based on a price mechanism tied to the Japan Customs Cleared Crude

price (JCC), also called the “Japan Crude Cocktail.” The contracts,

which are skewed in favour of the suppliers to ensure they get a return

on their large infrastructure investment, are long-term, and once

finalised, remain in place for the duration of the contract which is

usually 20-30 years, and are rarely up for renegotiation, although some

limited volume flexibility exists in some cases, such as allowing the

buyer to reduce the volume slightly by a fixed amount. They are also

subject to a destination clause, which prohibits a buyer from re-selling

LNG in the market.

As a result, by mid-2011 prices rose in excess of $15/mmBtu from

a low of $7.18/mmBtu in 2009, and further touched $18/mmBtu by

the end of 2014, compared to $8 to $10.70/mmBtu in the European hubs

and the Henry Hub (North American prices within a bandwidth of

$2/mmBtu to $6/mmBtu between 2009 to 2015. At the same time, the

Asian spot LNG prices from mid-2009 to early 2011 remained

significantly below the JCC price during this period. Hence, when the

Fukushima Daiichi accident occurred in 2011, and Japan began

importing more LNG to replace its closed nuclear power stations,

which resulted in a tight Asian LNG market, prices went up further.16

However, since then, several new LNG supplies have entered the

market, chiefly from Africa and Australia, as well as from the US due

to the shale gas revolution, leading to a surplus in supplies. The fall in

oil prices too had an immediate effect on oil-indexed pricing with spot

prices in Asia being set at around $6/mmBtu compared to $15/mmBtu

16. Howard V. Rogers, “The Impact of Lower Gas and Oil Prices on Global Gasand LNG Markets”, OIES Paper NG 99, Oxford Institute for Energy Studies,July 2015.


for terms sales, as it takes four-five months before oil prices are fully

reflected in contract prices.17 As a result, several LNG importers

switched from long-term contracts to the spot market or shorter term

contracts as well as employing a hybrid form of contract, which

involved a mix of European and US hub-based pricing formulae.18 In

the first quarter of 2017 however, LNG prices have recovered

somewhat, with Asian spot LNG prices ruling around $7.50 per

mmBtu, almost at par with NBP benchmarks.19

As the spot market for LNG grew, there were some calls for moving

away from oil-indexed pricing to a hub-based one. In Asia, there were

some suggestions that an Asian hub be created which would be

indicative of regional trade. To retain their markets, long-term suppliers

began offering concessionary prices in order to remain competitive,

although given the high costs in developing new capacity, LNG prices

are unlikely to collapse much further, particularly in Asia.

With oil prices looking to remain depressed for a while, as OPEC

members inclined to maintain production quotas to retain market share

by driving out high-cost production, hub-based cargoes may not

remain cheaper, as low gas prices have seen several planned LNG

plants being cancelled or put on hold. As in the case of the oil market,

if the gas market becomes globalised, a cyclical trend in prices may

take place in the gas market, leading to increased price volatility, as

low prices will eventually lead to a tapering off in supplies, while high

prices will lead to a supply glut.

At present, the gas market – particularly the Asian LNG market –

is in a state of flux, with no sure indication about which way it will

head. At the end of the day, contracts and pricing mechanisms will

have to suit both producers and consumers, which in turn will require

17. Anne Kat Brevik, “The Tide Has Turned for the Global LNG Market: A LookAhead to 2015 and Beyond”, Thomson Reuters, February 10, 2015 at http://blog.financial.thomsonreuters.com/the-global-lng-market-a-look-ahead-to-2015-and-beyond/

18. Tetsuo Morikawa, “Outlook and Challenges for Gas Markets in 2015”, TheInstitute of Energy Economics, January 2015 at http://eneken.ieej.or.jp/data/5914.pdf

19. Oleg Vukmanovic and Mark Tay, “Global LNG-Asia prices hit parity withBritish gas benchmark”, Reuters, February 3, 2017 at http://www.reuters.com/article/global-lng-idUSL5N1FO5T3


a market-based mechanism to be in place. However, as in the case of

the oil market, with security objectives taking precedence over

economic ones in several countries, prospects for a competitive, market-

based and deregulated gas market may be limited.

Growing Geopolitics

Despite new supplies coming into the market, natural gas resources,

like oil are not evenly distributed. Around 70 percent of the world’s

known conventional gas resources are found in a region which

stretches from Russia, Central Asia and West Asia. Moreover, natural

gas reserves have been found in the Eastern Mediterranean Sea, which

the United States Geological Survey in March 2010 assessed of having

a potential of around 112 tcf (3.17 tcm).20 Since the revenue accrued

from energy sales/exports are often the economic backbone of

exporting countries leads to political and economic interests of States

taking precedence over commercial competition. In order to defend

their national interests, States engage in strategic behaviour, which is

reflected in policies that are geopolitical rather than commercial. This

factor is expected to increase, as along with demand, the supply source

of gas also expands with the discovery of new sources of gas emerging.

With competition in gas-exporting countries poised to increase, States

often strategically manoeuvre in order to affect gas flows.

This proclivity of some countries to use their gas exports as a

foreign policy tool and influence gas flows raises concerns in gas

importing countries over dependence on gas imports. On the other

hand, gas-exporting countries, particularly those which are dependent

on transit countries or a small number of markets are also concerned

over losing market share to competitors and are weaving their energy

policies into their foreign policy strategies. Similarly, some of the large

energy consuming countries are leveraging their market as a diplomatic

tool, and ensuring that the promise of long-term demand is being tied

into their relations with energy producing countries. While energy –

20. “Assessment of Undiscovered Oil and Gas Resources of the Levant BasinProvince, Eastern Mediterranean”, U.S. Department of the Interior, U.S.Geological Survey, Fact Sheet 2010–3014, March 2010 at http://pubs.usgs.gov/fs/2010/3014/pdf/FS10-3014.pdf


more specifically oil – has always played a major role in traditional

geopolitics, the growing debate on carbon emissions and its fallout on

global warming has turned the spotlight on gas as a ‘bridge’ fuel in

the transition from fossil fuel-dominated global economy to cleaner,

greener energy resources.

Although gas is used worldwide, some countries are more

important for the gas market as their policies and strategies are

expected to either influence the way in which the gas market evolves,

or conversely, whose polices will be impacted by unfolding events in

the gas market. Although the following countries are the main movers

and shakers of the gas market, several newcomers have emerged more

recently. However, as their activities and policies are more

commercially oriented, they have not been dealt with separately.

The United States of America

The US has perhaps been the largest contributor to the changes that

have taken place in the energy markets, and more particularly in the

gas market. The American energy revolution brought about by fracking

technology, with the commercial exploitation of shale assets having

had wide-ranging geopolitical consequences. Apart from being closer

to realising its goal of being ‘energy independent’, the US is now poised

to become an energy superpower, rivalling Saudi Arabia and Russia

in the oil and gas markets. For the first time since 1971, energy will no

longer be perceived as a strategic liability for the country, and it can

now take policy decisions without having to factor in complex

obligations based on energy security considerations. Instead, the US’

new-found energy bounty is set to boost its leverage around the

world.21

As US production continues to increase, it is putting downward

pressure on global gas – and oil – prices, thereby reducing the

geopolitical leverage that traditional energy suppliers have wielded

for decades. For example, in 2012, while US gas prices stood at $3 per

million BtU (mmBtU), Germans paid $11/mmBtU and the Japanese

21. Robert D. Blackwill and Meghan L. O’Sullivan, “America’s Energy Edge: TheGeopolitical Consequences of the Shale Revolution”, Foreign Affairs, March-April2014 at


paid $17/mmBtU. Gas customers in various parts of the world will

now have the advantage of negotiating better terms with traditional

suppliers, and loosen the geopolitical grip of these producers from

Russia to West Asia.22

These changes may also see the emergence of new partnerships,

which will have considerations for the energy markets at its base, but

more importantly, will have far-reaching geopolitical implications, the

contours of which can be seen in the China-Russia gas deal of 2014.

Finally, the US fracking and shale gas revolution may well have

the greatest impact on the current pricing mechanism, as cheaper US

hub-based resources may instigate changes in the current regional

status of the gas market and nudge it closer towards a more globalised

orientation, akin to the oil market.

Russia

Its natural gas reserves are perceived to be the backbone of the Russian

energy sector, and more importantly, a powerful tool of the country’s

domestic and foreign policy. Not only does it play a key role in

establishing Russia’s credibility in the global energy economy, it is an

important tool in a number of significant foreign policy initiatives as

it allows Russia’s integration into global trade. Through joint ventures

and foreign investments, both within and outside Russia, Russian

business has been able to be integrated into global economic relations,

gradually making Russia a full-fledged participant in the global

economic system.23

With around 1,688 trillion cubic feet (tcf) (47.7 trillion cubic metres)

of natural gas reserves as of January 1, 2013, Russia accounts for about

a quarter of the world’s total proven reserves. At present, 76 percent

of its natural gas is exported to Western Europe through a vast network

of pipelines controlled by state-owned Gazpromand transiting through

Ukraine and Belarus.24

22. Ibid.23. Tatiana Mitrova, “The Geopolitics of Russian Natural Gas”, Center for Energy

Studies, James A. Baker III Institute for Public Policy, Rice University, February21, 2014.

24. Russia, US Energy Information Administration, March 12, 2014 at http://www.eia.gov/countries/analysisbriefs/Russia/russia.pdf


When Vladimir Putin took over Russia’s presidency, in line with

his policy outlined in an article he wrote in 1999, he moved to take

control of the natural resource sector, as he felt it was too important to

be left entirely to market forces. Putin understood that energy resources

and exports could be used to leverage Russia’s economic and

geostrategic revival, and after nationalising several independent oil

companies, the government systematically set about to monopolise the

European market, ruthlessly preventing any alternative suppliers from

emerging, either by buying gas from regional rivals at above-market

rates, or preventing any alternative transit routes from coming up by

engineering conflicts and even terminating supplies. Being Eurasia’s

largest gas supplier, Russia has a huge influence on the prices as well

as geopolitical leverage. However, Russia’s most effective weapon is

its gas network, and it has assiduously prevented any rival network

or route to come up. Whenever any former Soviet state has shown an

interest in integrating more closely with the West or NATO, Russia

has used pricing disputes to terminate gas exports. Some cases in point

are Belarus and Ukraine, both of which are important transit states

through which Russian oil and gas exports are sent to Europe.

However, these strategies have left client states, sometimes with

the support of the US, to explore alternative supply sources as well as

to seek reorganisation and reform of their energy sectors, which, if

successful, could see Russia losing its market monopoly.25 The recent

sanctions imposed by the West following Russia’s annexation of

Crimea has added to Russia’s economic troubles, at a time when Russia

needs foreign investments to develop new gas reserves in Siberia and

the Arctic to replace falling production from more mature fields. At

the same time, the emergence of new gas producers is cause for concern

for Russia. With new entrants in the gas production market growing,

Russia will be facing tough competition for markets.

As a result, Russia is now seeking to diversify its market to the

east and has been negotiating with potential Asian clients for markets.

In May 2014, in what is being seen as the biggest deal in the energy

25. Jonas Grätz, “Deflating Russia’s Gas Pressure”, Policy Perspectives, Vol. 1, Issue1, Center for Security Studies, September 2013 at http://www.css.ethz.ch/publications/pdfs/PP_01_08_2013.pdf


market, Beijing and Moscow ended months of fractious negotiations

and signed a $400 billion agreement wherein Russia would supply

China with up to 38 bcm of gas annually between 2018 and 2048. The

deal is being seen as a reiteration of the role geopolitics plays and will

continue to play in energy issues. Nevertheless, Russia will have to

overcome several challenges and introduce reforms in its gas sector if

it has to continue to retain its grip as a gas superpower.

West Asia (Iran, Qatar)

Although Iran has the second largest gas reserves after Russia, the

sanctions imposed on the country have not allowed it to gain access

to the technology or the financial resources it desperately requires to

become a global natural gas and LNG player. The sanctions also

deprived it of agreements on major pipeline deals to transport gas to

Europe or Asia. But following a deal between Iran and the P5+1 nations

on capping its uranium enrichment programme in July 2015, many of

the sanctions have been lifted, making it possible for Iran to come out

of decades of international isolation. However, while Iran has

embarked on a large-scale plan to rejuvenate its ailing gas – and oil –

sector, it will have to overcome several hurdles, many of them

emanating from its own domestic politics, before it can position itself

as a leader in the gas market over the next decade. As in the oil market,

where its regional rival Saudi Arabia stands in its way, Qatar, the US,

Russia and more recently Australia, stand in its way.

As the current reigning LNG superpower, Qatar’s natural security

policy is driven by increasing its international profile in order to protect

itself from the perils of its vulnerability as a small State sandwiched

between the two regional giants, Saudi Arabia and Iran. Using its vast

gas resources – the third largest in the world – it has gained an

international presence far beyond it size. However, it is now facing

competition from new producers, particularly in the Asian LNG

market, which is its traditional domain. Australia is constructing

liquefaction plants that will more than triple its annual LNG-

manufacturing capacity to 85 million tons by 2018, surpassing Qatar,

and even American producers have signed contracts to supply Asian

LNG buyers at competitive prices. As a result, Qatar stands to lose some

market share and may cut prices to retain markets. To hedge itself


against increasing competition, Qatar has bought stakes in oil and gas

fields in diverse countries as well as in international oil companies such

as Royal Dutch Shell and Total, both of which operate LNG plants

around the world.26 Whether Qatar succeeds in manoeuvring itself in

an over-supplied and increasingly competitive market will be a

testimony of its survival skills and business acumen.

Turkmenistan

Turkmenistan, which is estimated to hold around 17 tcm of natural

gas reserves– currently the fourth largest in the world – adopted a

foreign policy that was premised on “positive neutrality” following

its independence in 1991. While “neutrality” allowed it to build

strategic relations with all countries without joining any blocs, it also

allowed it a way out of its dilemma of maintaining relations with

Russia on the one hand, and forging relations with other countries on

the other. Iran is already a market, albeit limited, although pricing

disputes with Tehran have seen flows decreasing. Moreover, with Iran

now poised to become a major gas exporter following the lifting of

sanctions, the need to find other markets has become all the more

critical for Ashgabat.

At the time of independence, Turkmenistan, a landlocked country,

was completely dependent on the Soviet-era pipeline network to

transport its most valuable asset, natural gas, to other markets. Hence,

while in the initial years of independence, it continued to use the

Russian network, pricing problems with Gazprom saw Ashgabat

cutting off, or threatening to terminate gas supplies from 1997.

Subsequently, frequent disagreements over pricing, and Ashgabat’s

attempt at finding alternative markets have exacerbated frictions with

Russia, and recently, the latter terminated supplies from Turkmenistan

completely.27

26. Robert Tuttle, “Qatar’s LNG dominance challenged”, Washington Post, April 18,2014 at http://www.washingtonpost.com/business/qatars-lng-dominance-challenged/2014/04/18/90b06cda-c66c-11e3-9f37-7ce307c56815_story.html

27. Martha Brill Olcott, “ Turkmenistan: Real Energy Giant or Eternal Potential?”,Belfer Center, Harvard University and James A. Baker III Institute for PublicPolicy, Rice University, December 2013 at http://belfercenter.hks.harvard.edu/files/CES-Pub-GeogasTurkmenistan-121013-1.pdf


However, by 2009, Turkmenistan had found a ready client in

China’s CNPC, to which it supplies 35 bcm currently, with plans to

double supplies by 2020. Nevertheless, unwilling to become dependent

on a single market, Ashgabat has also been negotiating to further

diversify its market. Negotiations for two more projects are being

carried out – the first, which envisages transporting 33 bcm per year

of gas from the Galkynysh field to South Asia through the

Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, and the

second, the 30 bcm per year trans-Caspian pipeline (East-West Pipeline)

to Europe through Azerbaijan, with supplies from its Caspian Sea

reserves. Both projects are uncertain, however, the first due to security

issues given the conflict-ridden route of the project, as well as disputes

over giving stakes to the companies involved in exploration,

production and transporting the gas, and the second due to legal

disputes with other Caspian littorals over sovereign rights as well as

Azerbaijan.28 Hence, although Turkmenistan has the potential to

become a major gas supplier to European and Asian markets, it has to

overcome several obstacles, including its own land law policy, and

manoeuvre through regional geopolitical tensions before it can take

its place among the world’s gas giants.

Australia

Currently the second largest LNG exporter after Qatar, and poised to

become the leader by 2020, Australian gas producers are not in an

enviable position as continuing low prices from 2014 has seen it under

pressure from Asian buyers to renegotiate prices, particularly after its

massive $54 billion Gorgon project – the most expensive in the world

– comes on line. In addition, three unconventional coal seam gas (CSG)

projects are under construction in Queensland, one of which has

commenced production. Most of Australia’s current LNG production

is exported to Asia; more than 80 percent is exported to Japan, while

28. Andrew C. Kuchins, Jeffrey Mankoff and Oliver Backes, “Central Asia in areconnecting Eurasia: Turkmenistan’s Evolving Foreign, Economic and SecurityInterests”, Center for Strategic and International Studies, CSIS, June 2015 athttp://csis.org/files/publication/150513_Kunchins_CentralAsiaTurkmenistan_Web.pdf


China and Korea account for much of the remaining share.29 However,

following the slump in prices, concerns regarding the viability of the

Gorgon project have risen as supplies from new suppliers are

undercutting the project’s potential, rendering pricing below

production costs. Nevertheless, the project’s partners are optimistic,

banking on the hope that prices will not remain low forever and that

growing demand from the Asia-Pacific countries which are the main

buyers of Australian LNG, would see demand – and prices – go up

again, albeit over a period of time.

While Australia will certainly be a dominant actor in the gas market

over the next decade, particularly in the Asia-Pacific region due to its

geographical location, currently, the decisions taken on natural gas

development and marketing are based on market considerations and

not driven by geopolitical considerations.30 Hence, a separate chapter

on Australia has not been included in this book.

Arctic

Prior to the drop in the price of oil and gas, the Arctic was seen as the

last frontier for the world’s hydrocarbon resources, setting off fierce

competition among the Arctic littorals. Following a US Geological

Survey report published in 2008, which estimated that the region held

22 percent of the world’s technically recoverable oil and gas resources,

as well as the opening of sea routes following the melting of sea ice,

fierce competition broke out among these nations, with each vying to

expand their sovereignty and territorial space. The issue became more

complicated as non-Arctic observer States too tried to expand their

reach in the region. Over the last few years, some militarisation has

also taken place, with some States making overlapping claims over

large swathes of territory, and moving troops and equipment into the

region.

29. Natasha Cassidy and Mitch Kosev, “Australia and the Global LNG Market”,Reserve Bank of Australia, March 2016, Bulletin, at http://www.rba.gov.au/publications/bulletin/2015/mar/pdf/bu-0315-4.pdf

30. Ronald D. Ripple, “The Geopolitics of Natural Gas: The Geopolitics ofAustralian Natural Gas Development”, Belfer Center, Harvard University, andJames Baker III Institute, Rice University, Center for Energy Studies, January2014 at http://belfercenter.ksg.harvard.edu/files/CES-pub-GeoGasAustralia-011414.pdf


Since the drop in oil and gas prices, some of the lure of the region

has dissipated, as it is unlikely that the Arctic’s energy and mineral

resources will contribute to the global energy market till after 2025.31

As long as energy prices remain low, exploring for hydrocarbons in

the Arctic makes little economic sense. However, given that the region

may be the last fully unexploited space with abundant energy

resources, it is likely that the geopolitical competition that was seen a

few years ago will return.

While the countries and regions mentioned above are producers

and exporters of gas, countries that rely on importing their vital energy

supplies and are therefore seen as a being vulnerable. However, given

that energy security is as much about the security of markets as the

security of supplies, the need for retaining and protecting market share

make producers just as dependent on sustainable demand from key

economies. The shift in economic dynamism towards the East over the

past two decades is often seen as a rebalancing of geo-economic

leverage, with some major Asian economies using their markets for

geopolitical gains. Hence, these countries are seen as an important

anchor for the global supply-demand balance and an influential force

in global energy markets.

China

For China, the changes taking place in the natural gas and the overall

energy markets have given rise to concerns as well as opportunities

that could be exploited to its advantage. On the one hand, for China,

whose rapid economic growth allowed its international profile to grow,

energy security is critical in order to maintain its growth trajectory as

well as ensuring that its domestic climate remains peaceful. However,

its huge economic growth has meant a commensurate rise in demand

for energy and despite large investments in domestic production, its

demand has outstripped domestic supply, rendering the country

dependent on increasing imports. Moreover, its energy security

concerns have usually centred around its access to energy resources

31. “Opportunities and Challenges for Arctic Oil and Gas Development”, EurasiaGroup Report for The Wilson Center, Washington, D.C. January 2014 at http://www.wilsoncenter.org/sites/default/files/Artic%20Report_F2.pdf, accessed onMay 22, 2014.


often from unstable regions, and transported through sea lanes that

are dominated by the US navy. The US’ pivot Asia policy along with

the shifts that have taken place in the energy market due to the shale

revolution have also created concerns of encirclement, pushing China

to adopt an aggressive posture over territorial claims in the East and

South China Seas, both to control the energy reserves in the region as

well as to counterbalance Washington’s network of alliances in the

Pacific. Beijing is also trying to lessen its dependence on sea-based

transport, and the timing of the recent deal with Moscow is a sign that

it is hedging its vulnerabilities to ensure its energy supplies.

At the same time, the US shale gas revolution has benefited China

as it has driven oil and gas prices down. The freeing up of US-bound

gas supplies are now available for other consumers and can be

negotiated for better terms.

Nevertheless, in its pursuit of enhancing its energy self-sufficiency,

China is also trying to develop its own vast shale resources, given that

it has the world’s largest reserves of shale gas. The US EIA estimates

that China has total reserves of 1,211 tcf (34.3 tcm) of shale gas, almost

50 percent more than the 862 tcf (24.4 tcm) in the US. Although issues

about the economics and environmental consequences of developing

shale gas have to be taken into account, it also has the potential to

transform China’s energy landscape, provided China gains access to

the technology.32

Finally, China is well poised to replace the US as the largest energy

market, and while it has leveraged its growing demand to form loose

energy alliances and partnerships with several oil and gas producing

countries in Eurasia and West Asia, as well as Africa and Latin America,

it remains wary of its vulnerability to supply disruptions, particularly

in its maritime periphery. Moreover, faced with a slow-down of its

domestic economy, the China’s leadership began looking for new

avenues to sustain growth at a time when other developing countries

are experiencing rapidly rising demand. In 2013, Chinese President

32. Gal Luft, “What does America’s shale gas revolution mean for China?”, Journalof Energy Security, July 25, 2013 at http://www.ensec.org/index.php?option=com_content&id=452:what-does-americas-shale-gas-revolution-mean-for-china&catid=137:issue-content&Itemid=422


Xi Jinping first mentioned the plan, known as the One-Belt-One-Road

(OBOR) project. At the heart of the plan, which involves more than 60

countries, representing a third of the world’s total economy and more

than half the global population, lies the creation of an economic land

belt that includes countries in Central Asia, West Asia and Europe, as

well as a maritime route that links China’s port facilities with the

African coast, through the Suez Canal into the Mediterranean and

eventually into Latin America. The project aims to redirect the country’s

domestic over-capacity and capital into infrastructure development to

improve trade and relations with ASEAN, Central Asian and European

countries, as well as gain improved access to the Persian Gulf and the

Mediterranean Sea, as well as to the Indian Ocean and South China

Sea through Southeast Asia and South Asia.33

India

Where the Chinese gas market had earlier held out the promise for

gas exporters, India is being seen as a market with huge prospects.

According to the IEA, India is, or will be, the surprise factor in the

coming decades as its high economic growth has seen its demand for

energy, growing at a pace that is faster than any other country.

Although coal and oil will continue to form the backbone of India’s

energy sector, the government has declared that it plans to shift to a

gas-based economy, both by boosting domestic production as well

buying LNG, to meet its commitments to curb growing carbon

emissions. According to the IEA, India’s natural gas demand will grow

by 4.2 percent per annum to 2035, with demand growing from 5.3

billion cubic feet per day (bcf/d) or 0.15 bcm per day in 2012 to nearly

18 bcf/d (0.5 bcm/d) by 2035. Despite the optimism regarding

increased domestic production, its gas output has been falling due to

lack of investment and the low domestic prices which act as a

disincentive for the producers. Hence, India is expected to become

33. Xuming Qian, “The Belt and Road Initiatives and China’s Middle East EnergyPolicy”, International Relations and Diplomacy, October 2016, Vol. 4, No. 10, pp.611-616 at https://www.davidpublisher.org/Public/uploads/Contribute/586b5db7853d6.pdf; Francis Cheung, “A brilliant plan: One Belt, One Road”,Credit Lyonnais Securities Asia (CLSA) 2015 at https://www.clsa.com/special/onebeltoneroad/


more dependent on imports, which currently stands at 40 percent of

demand. As of now, the bulk of India’s LNG imports come from Qatar

through long-term contracts, while the remainder is purchased on

short-term and spot deals. India had also tied up a 20-year agreement

with ExxonMobil’s Gorgon facility in Australia, with supplies

beginning from 2016-17, and another 20-year contract with Cheniere

Energy from the US, with deliveries expected from 2017.34 However,

given the crash in prices, India is now negotiating with these suppliers

for better terms, preferring to pick up cheaper gas from the spot market.

It is also looking at importing piped natural gas from Turkmenistan,

under the TAPI project, as well as from Russia and Iran following the

lifting of sanctions from the latter. Nevertheless, given that plans are

afoot for constructing at least five more terminals, it would appear that

India intends to import LNG as opposed to piped gas.

What Lies Ahead?

The era of gas has been brought about by the fracking revolution and

the unlocking of vast amounts of shale gas that was previously

considered uneconomical to extract. The resultant pace and scale of

US shale gas production, has changed its status as the world’s largest

oil and gas importer to that of a potential exporter. The implications

of this go far beyond economic factors. Not only have natural gas prices

in the US plummeted – from $13 per million British thermal units

(mmBtu) in 2008 to around $3.80/mmBtu – leading to a scramble

among US producers to find overseas markets. This has not only raised

the potential of increased gas supplies globally, as supplies intended

for the US market are now freed up for other customers, but it has

also created the potential for other countries to explore their own shale

resource base for domestic use as well as commercial production, which

may lead to dramatic geopolitical changes.

As more supplies enter the market, leading to greater liquidity, it

could lead to a change in the structure of the current gas market, from

a predominantly oil-indexed and regional one to a competitive gas-

34. Charles Ebinger and Govinda Avasarala, “Natural Gas in India: DifficultDecisions”, Belfer Center, Harvard University and James Baker III Institute,Center for Energy Studies, Rice University, October 2013.


on-gas priced market, that is more global in nature. Given the wider-

than-oil but still uneven distribution of gas resources in the world,

geopolitical factors will gain ground in the gas market, as countries

may increasingly use their resources or markets as an instrument to

further their broader geopolitical and economic interests.

However, given the nature of the gas market as well as the

infrastructure required for gas, there are numerous challenges that will

have to be overcome before gas can replace oil, or for that matter, other

competing fuels. Gas infrastructure – both for piped gas as well as LNG

– takes years to build and involves huge costs. Moreover, given the

high reliance on fixed infrastructure, finding alternative supplies in

the event of disruptions can be difficult, as the gas spot market is

relatively small, despite growing liquidity, and requires more

liberalisation, along with more contractual flexibility with regard to

re-directing cargoes.

Finally, the future of shale gas is still uncertain, and the current

production surge can be reversed in a few decades, causing a rise in

prices, which will affect consumers all over the world, similar to that

in the oil market. Already, with a rise in oil prices, a concurrent rise in

gas prices has also taken place, reiterating the need for a de-linking

oil and gas prices.

Therefore, while significant changes are taking place in the gas

market, which over the years will have far-reaching consequences and

implications for the global energy market as well as geopolitics, it may

take a while before the golden age of gas can become a reality.

2THE UNITED STATES OF AMERICA –

THE GAME CHANGER

“Energy independence” has been a mantra that has been stated as a

goal by successive American presidents and leaders. But not only did

the US become a net energy importer by the 1950s, by the early 1970s,

it had become the largest importer of oil. Since then, the one of the

cornerstones of the country’s foreign policy was dictated by the need

to not only secure an uninterrupted flow of oil, but to ensure that it

was priced affordably. With the West Asian region holding the largest

oil reserves, it was only natural that the region was a major focus of

its foreign policy. Hence, during the Cold War, US strategy was

primarily aimed at ensuring that the vast oil reserves of the Persian

Gulf states did not fall into Soviet hands. When Washington lost

influence over one of its key allies in West Asia, following the Iranian

revolution in 1979, and subsequently the invasion of Kuwait by

Saddam Hussein, its policy was geared towards preventing these

countries from threatening the US’ oil-rich Arab allies. When a

sanctioned Iraq tried to sell its oil in Euros, threatening the dollar’s

hold over the oil market, Saddam Hussein was removed.

Interestingly, although the US was till recently the largest importer

of oil and gas, the West Asian region per se was not a major source of

oil or gas for the US. But oil being a fungible commodity meant that

irrespective of where production disruptions occurred, the stability of

the entire oil market is affected, mostly due to the impact on prices as


well as being a major source of supply for its European and Asian allies.

Hence, although the US’ primary sources of oil – or for that matter gas

– imports was not the West Asian producers, the instability of the

region had an impact on the US economy as it not only meant higher

oil import bills for itself and its allies,1 but also because oil and gas

revenues sustained the reign of its West Asian allies. Moreover, with

oil being traded only in dollars as per the 1945 agreement between

the US and Saudi Arabia, it was essential that Washington exercise

control over this vital commodity. And in so doing, it was also

vulnerable to the impact of oil-related politics of the producing

countries.

Now, for the first time since the 1970s, the US has an option to

distance itself from the geopolitics of the oil market, and particularly

that of the West Asian oil producing countries. With production of oil

and gas averaging around 8.6 mbd in 2016 and natural gas production

at 769 billion cubic metres (bcm),2 the US is not only in a position to

cut its oil and gas imports, but also to become a major global supplier.

This change in its energy scenario was made possible through the

breakthrough in horizontal drilling technology combined with

developments in hydraulic fracturing (fracking) technology, due to

which the economic feasibility of production of oil and gas from shale

formations has increased. As the US has substantial shale formations,

and has seen a rapid increase in the production of shale oil and gas,

there are reports from the Department of Energy (DoE) that with a

combination of energy efficiency measures, lower consumption and

huge production of shale gas as well as oil, it would not be long before

a shale resource-driven US would not only be in a position to reduce

– perhaps even end its energy imports – but would enable it to call the

shots in the global energy market, thereby gaining a tremendous

geopolitical advantage. Only, now the US’ energy geopolitics will be

driven not only by its oil production, but also by gas.

1. Stephen P.A. Brown, Hillard G. Huntington, “Assessing the US oil securitypremium”, Energy Economics, Vol. 38, 2013, pp. 118-127.

2. “U.S. Petroleum and Other Liquids, Short-Term Energy Outlook”, US EnergyInformation Administration, DoE, June 7, 2016 at https://www.eia.gov/forecasts/steo/report/us_oil.cfm, and “Natural Gas Production”, Global EnergyStatistical Yearbook 2016, at https://yearbook.enerdata.net/world-natural-gas-production.html

The United States of America – The Game Changer 27

According to the recent BP World Energy Outlook 2017 projections,

while fossil fuels will continue to provide the majority of the world’s

energy needs, meeting two-thirds of the increase in energy demand

out to 2035, there will be a shift in the energy mix. Driven by climate

change concerns, natural gas, including shale gas, along with

renewable energy resources, nuclear and hydro energy, will now

dominate the global energy basket. Moreover, gas – which is projected

to be the fastest growing fossil fuel, as well as the cleanest – will meet

much of the increase in demand as coal and oil combined.3

A Gas-Based Resurgence

When Barack Obama took over the presidency in 2009, the US was

already reeling under the impact of the economic recession that had

taken over the Western countries. It was not surprising therefore that

Obama’s campaign rhetoric focused on economic recovery as well as

the re-emergence of America as a global energy leader.

The energy policy adopted by him during his first term underscored

the point that a global race was underway in taking over the leadership

over the development and manufacture of clean energy technologies,

with countries like China and even India playing to win. He exhorted

the American people to take back the mantle of energy leader. In his

State of the Union Address, the President proposed an ambitious but

achievable standard that by 2035, the US would generate 80 percent of

electricity from a diverse set of clean energy sources – including

renewable energy sources like wind, solar, biomass, and hydropower;

nuclear power; efficient natural gas; and clean coal, and called for

investors to move billions of dollars into the clean energy economy,

creating jobs across the country and reducing air pollution and

greenhouse gas emissions. In his 2011 Blueprint for a Secure Energy Future,

the Administration outlined the government’s priority as maintaining

America’s leadership in Research and Development (R&D), which was

critical to winning the future and deploying innovative technologies

that will create quality jobs and move towards clean energy economy

that would further reduce the country’s reliance on oil.4

3. BP Energy Outlook 2017 at https://www.bp.com/content/dam/bp/pdf/energy-economics/energy-outlook-2017/bp-energy-outlook-2017.pdf

4. Blueprint for a Secure Energy Future, The White House, March 30, 2011.


Despite the focus on renewable and alternative energy resources,

hydrocarbons and the need for imports would continue to be an

important area for the country’s energy policy. Like his predecessors,

Obama too talked about the need to free America from energy import

dependency, and specifically from the Persian Gulf region, and

advocated increasing domestic production of hydrocarbon resources

by opening up environmentally fragile areas in Alaska and the Gulf

of Mexico.5 But, as he stated in his first address to the nation after

winning his second term, his strategy towards achieving “energy

independence” was based on the natural gas boom in North America

and not on the need to reduce energy imports from other regions.6

As a result, despite the fact that almost all US presidents since

Richard Nixon have been talking about the need for energy

independence, or rather, the need to reduce dependence on Persian

Gulf for its oil imports, it is for the first time that the goal seems to be

realisable. Based on a policy that combines a number of factors such

as a resurgence of domestic oil and gas production including from areas

that were hitherto closed due to environmental concerns, greater

efficiency standards in energy consumption across the board, and

wider spread of renewable energy and the commercial viability of US

shale gas production, never since the 1970s has the US been closer to

becoming an energy provider as against a net energy user.

Now, in 2017, the election of Donald Trump has seen the balance

tilt even further towards fossil fuels. His vow to “unleash an energy

revolution” by reversing regulations on oil and gas drilling on federal

land and offshore exploration, including shale resources, and speeding

up approval of new oil pipelines, including the Keystone XL and the

Dakota Access7, under his “America First” energy plan, has seen

5. “Obama Announces Plans to Achieve Energy Independence”, The WashingtonPost, January 26, 2009 at www.washingtonpost.com/wp-dyn/content/article/2009/01/26/AR2009012601147.html?sid=ST2009012601175

6. “Obama’s 2013 State of the Union Address”, The New York Times, February 12,2013 at http://www.nytimes.com/2013/02/13/us/politics/obamas-2013-state-of-the-union-address.html?pagewanted=all

7. Jeff Brady, “‘America First’ Energy Plan Challenges Free Market Realities”National Public Radio (NPR), February 7, 2017 at http://www.npr.org/2017/02/07/513905161/trumps-energy-shift-could-bring-higher-gas-prices-analysts-say


natural gas production rise to 73.7 bcf per day (2 bcm/d) in 2017, up

by 1.3 bcf per day from 2016 levels. In 2018, the forecast for natural

gas production is another 4.1 bcf per day increase from 2017. Moreover,

this American bonanza of natural gas – and oil – exports are also poised

to increase. While LNG exports are expected to rise to 12 bcf per day

(0.339802 bcm per day) by the end of 2017 and if cross-border pipeline

trade with Canada and Mexico are factored in, it may become a net

exporter of natural gas by a margin of as much as 15 bcf per day

(0.424753 bcm per day).8 If these forecasts bear out, it will have huge

implications for the energy – particularly the global – gas market.

Traditional LNG exporters like Russia and Qatar have already sounded

their concern over losing key markets in Europe and Asia respectively.

Already there are reports that Cheniere’s Sabine Pass LNG terminal

in Louisiana exported 11 cargos in December 2016 to China, Japan and

South Korea, Asia’s largest gas markets.

The ‘Revolution’

Although the first recorded extractions of shale gas took place in 1825

in Fredonia, New York, the fracturing or ‘fracking’ technology has only

recently matured to a level where commercial-scale production has

become viable. However, it was only after 1976 when the US

government began investing in gas research as part of the Eastern Gas

Shales Project that the potential of shale began to emerge. From 1980

to 2000, tax incentives were given, to promote shale drilling, providing

the stimulus required for technology innovations. But it was only in

2006, that the ‘revolution’ was formally launched in the Parshall field

in Bakken-Three Forks, North Dakota – originally discovered in 1951

– that has turned global energy production upside down,9 putting the

US back in control of the energy markets.

While the shale gas revolution has ensured that the US’ concerns

over dependence on energy imports have been allayed for now, it is

8. “Natural gas prices in 2017 and 2018 are expected to be higher than last year”,Energy Information Administration, US Department of Energy, January 23, 2017at http://www.eia.gov/todayinenergy/detail.php?id=29632

9. “The Shale Gas Revolution: What You Need to Know”, Allegro Development, 2013at http://www.allegrodev.com/whitepapers/Allegro—The-Shale-Gas-Revolution.pdf


in the strategic domain that the US stands to gain the most. At home,

increased production of shale resources has not only bolstered the US

economy by bringing down the price of oil and gas at the pump as

well as its energy import bill, but has also contributed to the economy

by creating thousands of jobs across the energy sector. According to

data contained in the 2015 Annual Economic Report of the President

transmitted to the Congress, the total employment in the oil and natural

gas industries, including extraction and support activities, increased

by 133,000 jobs between 2010 and 2013, and continued to grow through

2014.10

The rise in energy production has also led to the recent

improvement in the trade deficit. Hence, while in 2006, the total trade

deficit was 5.4 percent of the GDP, by the end of 2013, the trade deficit

had fallen to 2.8 percent of the GDP, the lowest since 1999, barring the

crisis-affected year of 2009.11

Moreover, the greater availability of gas, and the concurrent fall in

retail prices, led to a shift from coal-based generation of power to more

gas-based generation, bringing the share of coal in the US electricity

market down from 50 percent to 39 percent, while gas-fired plants

account for about 32 percent of the electricity basket, thereby

contributing to a reduction in carbon emissions.

Strategic Benefits of US Gas Exports

Despite the robust opposition both from sectors of domestic industry

as well as environmentalists, as the Energy section of the Economic

Report of the President states, one of the biggest benefits of the shale

revolution for the US is its fallout on its foreign policy. Without the

increase in production and concomitant reduction in dependence on

imports, it would not have been possible to have taken action against

Iran by way of imposing sanctions, as it would have a deleterious

impact on international oil prices and risk further destabilising an

already beleaguered global economy. Moreover, it was thanks to the

10. Economic Report of the President, together with the Annual Report of theCouncil of Economic Advisers transmitted to the Congress, February 2015 athttps://www.whitehouse.gov/sites/default/files/docs/cea_2015_erp.pdf

11. Ibid.


extra American oil and gas supplies that did not see prices escalate

more steeply during the Arab Spring disturbances, although actual

supplies were not affected as much as were expected.

Beyond economic benefits, the shale gas revolution has greater

significance for the US’ strategic goals. With several LNG cargoes

meant for the US market now freed up for redirection to Europe and

Asia, it set the course for a sea change in the world gas market. Without

an over-supplied gas market, and potential alternative supply sources,

it would not have been possible for Europe to free itself of Russia’s

proclivity to use its monopoly over its gas market as a political weapon.

For Asian countries, the largest LNG importers in the world, it has

provided not only alternative sources of supply but has also provided

alternatives to dependence on the West Asian energy producers. It has

also provided the option of flexible and cheaper pricing models from

the hitherto costly oil-indexed term deals they were dependent on.

Now there is a real possibility of the gas market becoming a global

market instead of the existing regional one. With 22 LNG import

terminals in the US in the process of being converted into export

terminals, the LNG market is set to expand, to rival the existing

pipeline-dominated and regionally divided gas market to a more liquid

and truly globalised market.12 As of June 2016, the Federal Energy

Regulatory Commission (FERC) had given final approval to 10 LNG

export proposals, of which six are under construction, and four have

not yet commenced with construction.13 (see Map 2.1)

As American gas enters the global market, it will increase global

supply and push global prices down. Lower natural gas prices around

the world have a positive geopolitical impact for the US as it would

reduce European dependence on Russian gas, particularly the Central

and Eastern European nations, and prevent it from exerting political

pressure on these nations. It would also allow many Asian nations

which are highly dependent on imports from West Asia, to reduce their

12. Robert Manning, “The Shale Revolution and the new Geopolitics of Energy”,Brent Scowcroft Center on International Security, Atlantic Council, November2014 at http://www.atlanticcouncil.org/images/publications/Shale_Revolution_ and_the_New_Geopolitics_of_Energy.pdf

13. “North American LNG Import/Export Terminals Approved”, FERC at http://www.ferc.gov/industries/gas/indus-act/lng/lng-approved.pdf


dependence on a region that is politically turbulent, and provide them

the option of diversifying their supplies from a steadier and more

reliable source of supply.14

At the same time, it would allow the US to strengthen ties with

allies and trading partners around the world. Moreover, US LNG can

also help the developing world by providing not only a source of

affordable energy, but also one that is less carbon-intensive than the

fuels that these countries are now using, and assist them in reaching

their environmental objectives.15 In effect, rising US gas exports would

lead to rising American global influence.16

Map 2.1

14. “Prosperity at Home and Strengthened Allies Abroad – A Global Perspectiveon Natural Gas Exports”, The Policy Paper Series – Transforming Ideas IntoSolutions, U.S. House of Representatives Committee on Energy and CommerceChairman Fred Upton, Vol. 3, Issue 1, February 4, 2014, energycommerce.house.gov at http://energycommerce.house.gov/sites/republicans.energycommerce.house.gov/files/analysis/20140204LNGexports. pdf

15. Ibid.16. Ibid.


Opportunities and Challenges for US Gas Exports

According to the President’s Economic Report’s section on energy, over

the last decade, with US natural gas production increasing by roughly

40 percent, the US can produce more than enough natural gas to meet

domestic demand affordably as well as support exports. However,

while US LNG construction is scheduled to export large volumes over

the next three years, Australian supplies are expected to come on line

by 2017, raising concerns that a further saturation of the LNG market

will drive prices down further.

However, in what could prove to be a game changer with the

potential to catapult the US into the group of leading gas exporters, is

the inauguration of the newly expanded Panama Canal on June 26,

2016. Following the deepening and widening of the Canal, which

connects the Atlantic Ocean to the Pacific Ocean via the Caribbean

Ocean, the US will now be able to handle around 90 percent of the

world’s LNG tankers – as against the current 6 percent – and a carrying

capacity up to 3.9 bcf (0.1092 bcm) of LNG, besides shortening the travel

time and transportation costs for US suppliers to key overseas markets.

For example, the transit from the US Gulf Coast through the Panama

Canal to Japan will now cut the voyage time to 20 days, compared to

34 days for voyages around the southern tip of Africa or 31 days if

transiting through the Suez Canal. The voyage time to South Korea,

China, and Taiwan too will be reduced, as will voyage time to South

America, although it will not have any impact on voyages to India.17

With about 9.2 bcf per day (0.2576 bcm per day) of liquefaction capacity

either in operation or under construction by 2020, of which more than

4 bcf per day (0.112 bcm per day) under long-term (20 years) contracts

with markets in Asia, and an additional 2.9 bcf per day (0.0812 bcm

per day) capacity under construction and contracted to various

countries, the US is set to become the world’s third-largest LNG

producer, after Australia and Qatar. And with advantages of time and

cost-cuts following the expansion of the Canal, the US will have

narrowed the advantage gap with Australia in terms of Asian markets.

17. “Expanded Panama Canal reduces travel time for shipments of U.S. LNG toAsian markets”, Today in Energy, Energy Information Administration, USDepartment of Energy, June 30, 2016 at http://www.eia.gov/todayinenergy/detail.cfm?id=26892


The US will, however, have to deal with domestic opposition to

LNG exports due to their impact on domestic prices. Those who favour

exports are of the opinion that even if domestic prices do rise, some

benefits to the US will accrue. According to EIA estimates, US

residential retail prices would rise by 2 percent between 2015 and 2040.

Nevertheless, with an increase in exports, the resulting price changes

would have a number of beneficial effects on producers, besides

attracting more investment, increasing employment, and most

importantly, enhancing the country’s geopolitical security.

A second set of challenges have also emerged against developing

shale resources from the environmental lobby. Their argument rests

on three issues. First, it damages the environment and endangers local

communities. Moreover, it also impacts on drinking water resources

by contaminating wells due to acquiring water to use in stimulating

the well and mixing the fracking chemicals with the water to construct

wells, inject the fracking fluid into the well, and handle fracking waste

water that flows back up the well. Opponents of fracking maintain that

at the end of the day, gas was a fossil fuel and therefore not much better

than coal or oil when it comes to emitting greenhouse gases (GHG),

and would require changes during the production process.

Third, with renewable energy now making so much progress, and

with the US now one of the largest producers of renewable energy,

these should lead the way for the transition to a zero-carbon future.

On the other hand, use of natural gas would potentially stand in the

way of developing renewables.18

Finally, there are doubts whether the US could become the world’s

dominant LNG player. Some experts are of the opinion that most of

the gas liquefaction projects planned in the US would never get off

the ground, mainly because of the drop in oil prices. Due to the linkage

between LNG contracts and the price of crude, the price advantage of

US LNG projects would be wiped out. In a paper, Leonardo Maugeri

said that it was likely that not more than five or six LNG export plants,

as against the 30 planned, would materialise in the US through 2020.

18. Michael Levi, “Fracking and the Climate Debate”, Democracy, Issue 37, Summer2015 at http://www.democracyjournal.org/37/fracking-and-the-climate-debate.php


Over the past few years, US natural gas prices have been about $4 per

1000 cubic feet, with oil around $100 a barrel, giving US gas a price

advantage. But with crude prices falling over the last six months to

under $50-60 a barrel, the oil-to-gas price ratio has shrunk, as natural

gas in the US is hovering near $3 per 1000 cubic feet. Moreover, falling

natural gas prices in Asia have further complicated the situation. The

price has dropped by some 50 percent less than a year ago, which has

eroded the advantage US exports had earlier. Given the huge costs

involved in LNG infrastructure, several projects are likely to be

delayed.19

To address these concerns, the Obama Administration released a

much-delayed draft assessment issued by the Environmental

Protection Agency (EPA) on the effect of the production technique on

“specific instances” when fracking “led to impacts on drinking water

resources, including contamination of drinking water wells.” Although,

earlier, the EPA had maintained that there was no evidence that

fracking had contaminated drinking water, the study confirmed that

fracking had indeed done so, albeit with the caveat that the number

of contamination cases was not as widespread compared to the number

of hydraulically fractured wells, and that the allegations of

contamination were not confirmed as there was insufficient pre- and

post-hydraulic fracturing data on the quality of drinking water

resources.20

Moreover, as the Energy section of the Economic Report of the

President states, natural gas has played a central role in the transition

to a clean energy future as fuel switching, including replacing coal with

natural gas as well as renewables like solar and wind energy, almost

halved CO2 emissions in the power sector from 2005. It also stated that

unconventional (shale) natural gas development has opened a vast

resource and had increased quantities of natural gas production, which

19. Ted Griggs, “Plans for export facilities in doubt”, The Advocate, February 7, 2015at http://theadvocate.com/news/business/10650285-123/falling-oil-prices-put-proposed

20. “Assessment of the Potential Impacts of Hydraulic Fracturing for Oil and Gason Drinking Water Resources”, Executive Summary, US Environment protectionAgency, June 2015 at http://www2.epa.gov/sites/production/files/2015-07/documents/hf_es_erd_jun2015.pdf


had benefited the economy. It also states that the Administration had

taken steps to ensure that natural gas and oil production would be

undertaken in a responsible manner with environmental safeguards

and that the current development of natural gas generation

infrastructure “prepares the Nation for future widespread deployment

of wind and solar generation.” Given that high market penetration of

wind and solar energy would benefit from either storage or backup

generation capacity, developing natural gas infrastructure today would

facilitate its use tomorrow for peak demand and renewable backup

generation.21

Can LNG Exports Achieve US Geopolitical Strategic Goals?

Traditionally, the US has exported gas, primarily by pipeline, to Mexico

and Canada. It has also exported LNG from Alaska to Japan, although

in small volumes. Now, shored up by huge volumes of gas being

produced from shale reserves, the US is poised to become a major

player in the gas market. According to EIA estimates, domestic

consumption of natural gas from 2015 to 2040 would be 31.6 percent

of their resource estimates, and with consumption comprising only 17

percent of resource estimates, exports would not threaten America’s

supply of natural gas.

Apart from the economic benefits accruing from revenue earned

and lowering imports, the prospect of becoming a major gas exporter

could have effects that go beyond energy markets. For example, LNG

exports would be able to support American allies in two regions, viz.,

Europe and Asia, by helping them diversify their energy sources and

reducing the political clout of some producers by expanding the supply

pool. In fact, in 2012, some former US Secretaries of Energy, viz., Bill

Richardson and Spencer Abraham, stated that LNG exports can

buttress US geopolitical leadership and trade, while at the same time,

continuing to support low domestic natural gas prices and a

renaissance in domestic manufacturing.

21. “The Energy Revolution: Economic Benefits and the Foundation for a Low-Carbon Energy Future”, 2015 Economic Report of the President, Chapter 6 athttps://www.whitehouse.gov/administration/eop/cea/economic-report-of-the-President/2015


The most vulnerable region to such energy-based pressure was

Europe, particularly the Central and Eastern European states like the

Czech Republic, Hungary, Bulgaria and Greece, because of their high

dependence on Russia for natural gas. Russia has demonstrated its

willingness to use energy as a political tool, cutting off natural gas

supplies to European consumers several times over the years – in 2006,

2009 and more recently in 2014-15, when Gazprom halved supplies

through the Nord Stream22 – to maximise Moscow’s political influence.

Despite attempts by the EU to lessen their dependence on Russian gas

through diversifying sources of supply, they have met with only

moderate success thus far. Therefore, the shale gas revolution in the

US has led to the expansion of US LNG exports to Europe which could

help these countries reduce Russian influence.23

With respect to its Asian allies, particularly Japan, which is the top

importer of LNG, the post-Fukushima incident led to a steep rise in

LNG demand to replace nuclear energy, thereby pushing up prices and

impacting the Japanese economy. This could be capitalised by Russia,

which is considering building LNG export terminals in the Far East to

service Japan. South Korea, the second largest LNG importer after

Japan, is also in a similar situation. Hence, US LNG exports would

serve to create a more liquid Asian market for LNG and lower prices.24

An even greater benefit accruing from the addition of US LNG to

global markets than providing new supplies to its allies would be

hastening the decline of the oil-indexed pricing formula. The gas

market being regional in nature, LNG suppliers are able to dictate

prices. As a result, consumers in Europe and Asia pay a huge premium

for oil-indexed gas. However, with the influx of more LNG into the

market, the market is becoming more liquid, putting pressure on oil-

indexed prices as more and more consumers are turning to the spot

22. Jack Farchy, Kathrin Hille, Roman Olearchyk and Christian Oliver, “Russia cutsoff gas supplies to Ukraine”, Financial Times, June 16, 2014 at https://www.ft.com/content/db64d8f8-f522-11e3-afd3-00144feabdc0

23. Nick Cunningham, “The Geopolitical Implications of U.S. Natural Gas Exports”,Perspective, American Security Project, March 2013 at https://www.americansecurityproject.org/ASP%20Reports/Ref%200116%20-%20The%20Geopolitical%20Implications%20of%20U.S.%20Natural%20 Gas%20Exports.pdf

24. Ibid.


market which is based on hub-based pricing formulae. It may

eventually lead to a decoupling of oil and gas pricing. Already, Asian

and Russian gas exporters are being forced to accept spot prices instead

of oil-indexation. Greater spot market liquidity would also mean fewer

destination-restricted vessels, which have cramped the LNG market’s

ability to respond to changing market conditions.

Finally, by improving energy efficiency and taking advantage of

shale gas as a transitional fuel and thereby reducing its carbon

emissions, the US would be able to provide international leadership

to address climate change. According to EIA 2012 data, from 2005 to

2012, the US reduced its total CO2 emissions more than any other

nation. Revenue earned from gas exports, and reduction in imports

would allow more R&D funding for the development of clean energy.

Moreover, while at home, replacing coal in the power sector and oil in

the transport sector would cut emissions, by making more gas available

in the global gas market; it would also assist other countries to cut

emissions by replacing gas with other more carbon-intensive fossil

fuels.

Impact of Energy Independence on US Foreign Policy

Prior to the shale revolution, the US, which had been severely affected

by the 2007-08 financial crisis, was being perceived as a descendant

power, unable or unwilling to deal effectively with the many crises

emerging in various parts of the world, most notably in West Asia.

Given its status as the world’s largest reservoir of conventional oil and

gas, the free flow of resources from the region was a key imperative of

the US’ foreign policy, although the US per se was not a major market

for West Asian oil and gas. Now, with the revolution wrought by its

shale reserves and fracking technology, the US is poised to become a

potential oil and gas exporter, as well as the largest energy producer,

concerns over supply disruptions no longer hold the same critical

importance. Hence, removed from such concerns, Washington will be

able to take foreign policy decisions based on its interests alone,

without energy supply pressures weighing in.

Several Western writers have hailed the advent of a new era of

energy independence that will allow the Western world to free itself


from the shackles of Arab oil and gas. On the other hand, the Gulf

regimes are concerned that an energy-rich US will no longer be as

engaged as before in the region, devoid of the security umbrella that

the US had provided. Although the US has denied shifting its attention

away from the West Asian region, and in fact, according to a

Department of Defense report on its budget priorities, the US plans to

“rebalance its force structure and investments toward the Asia-Pacific

and the Middle East regions while sustaining key alliances and

partnerships in other regions”,25 there is a perception that a strategic

shift is imminent. Moreover, following the signing of the nuclear deal

with Iran and the P5+1 and the potential strategic changes that may

take place in Iranian-American relations resulting in the rise of Iranian

influence in the region, the Arab regimes’ concerns are understandable.

However, the major long-term regional threat is a rising China with

its rapid economic growth and desire of its leaders to restore what they

see as Beijing’s rightful dominance, not only in East Asia, but also

beyond. With the fast build-up of China’s military, including a blue-

water navy and upgraded nuclear strike force, Beijing has already

signalled its intention to assert its claim over territory in the East and

South China Sea, building new islands on shoals in international waters

and establishing air and naval bases to project Chinese power, but is

also extending its influence in West Asia. It has built strong ties with

Israel, and is currently its third-largest trading partner, while Israel is

China’s second-largest source of military technology.

On the other hand, Chinese companies have invested heavily in

infrastructure, engaged in arms sales, and invested heavily in the

energy sector of the Arab and other Muslim countries in the West Asian

region. Given that more than half of its oil and a large portion of its

gas imports come from West Asia, the ties with the region are expected

to be strengthened further.26

More importantly, with the fate of the dollar largely tied to oil, can

the US afford to see the dollar replaced by other currencies? Trading

25. “Defense Budget: Priorities and Choices”, Department of Defense, January 2012at http://www.defense.gov/news/Defense_Budget_Priorities.pdf

26. David Lai and Noah Lingwall, “China: A Solution in the Middle East?”, TheDiplomat, June 18, 2015 at http://thediplomat.com/2015/06/china-a-solution-in-the-middle-east/


oil and gas in dollars since the 1945 agreement with the Saudis in return

for US military security and protection, has kept the demand for US

dollars by all nations who needed to trade hydrocarbons constant, and

thereby allowed Washington to become a financial hegemon. However,

since 2013, Russia began selling its hydrocarbons in Rubles and in the

currencies of its trading partners, like China and other BRICS countries.

Currency swaps between Russia and China have already been

implemented, while similar swaps are underway between these two

countries on the one hand and other countries which are members of

the Shanghai Cooperation Organisation (SCO), including prospective

members like Iran, Pakistan and India, as well as Mongolia.27

By becoming an energy superpower in the same genre as Russia

and Saudi Arabia in terms of gas and oil respectively, the US can to

some extent avoid, or at least stave off, the potential economic disaster

that the demise of the petrodollar would bring, as well as gain a

geopolitical advantage. It would allow Europe to reduce – perhaps

end– its dependence on Russian gas, as well as deny Russia the revenue

that it acquires from the sale of gas. It would encourage investments

in the American energy sector, including those from West Asian energy

producers as political turmoil in the region makes the region

unattractive for further investments, thereby strengthening ties with

these states. With more liquidity in the gas market, it would accelerate

the move towards a more global gas market, and forestall any attempt

by Russia, Qatar and Iran to form a gas cartel.

It would allow its Asian allies like Japan and South Korea, as well

as India, the independence to not only diversify their LNG import

sources, but also have access to hub-based spot price index. As

Singapore’s Ambassador to the United States Ashok Kumar Mirpuri,

said at a forum hosted by the US Subcommittee on Energy and Power

entitled “U.S. Energy Exports: Geopolitical Implications and Mutual

Benefit”, in October 2013, “Increased LNG exports (to Asia) would

further anchor the US economic presence and further contribute to

enhancing the region’s energy security. In doing so, the US would

27. Peter Koenig, “Russia and China: The Dawning of a New Monetary System?”,Global Research, January 9, 2015 at http://www.globalresearch.ca/russia-and-china-the-dawning-of-a-new-monetary-system/5423637


strengthen its partnerships in the region, serving regional stability and

its global interests.”28

However, all the above would be contingent upon the ability of

US producers to maintain production at high levels. And here lies the

dilemma. With Saudi Arabia and Russia fighting back to retain their

market share by retaining production levels and keeping prices at a

level that will hurt high-cost output, including shale production, US

shale producers are finding it difficult to keep up with production in

the face of falling prices. Till 2015, the EIA’s figures indicated that after

four years of record supply, natural gas output in the US has been

declining as drillers curtail gas output from reservoirs to prevent

further price declines.29 But after prices started picking up following

the November 2016 OPEC deal, there has been signs of some rig activity

again.

Moreover, with Iran now back in the picture as a potential oil and

particularly gas producer – and a potential exporter in the not too

distant future – the global gas market, already over-supplied, runs the

risk of seeing prices dropping once again. The new US Administration’s

‘America First’ policy, which has removed regulations on oil and gas

drilling, may hasten the fall, as huge supplies are expected to enter

the market from 2017 through 2025. Apart from the LNG export

terminal at Cheniere Energy’s Sabine Pass, which began shipments in

2016, additional LNG export terminals are planned within the next

several years, including the Cove Point facility in Lusby, Maryland,

which is scheduled to open by end-2017. More than half of the LNG

export capacity that is scheduled to be online by 2020, has been

contracted to Asia, as the expansion of the Panama Canal cuts travel

time to the region.30

28. “Transforming Ideas Into Solutions Prosperity at Home and Strengthened AlliesAbroad – A Global Perspective on Natural Gas Exports”, no. 14.

29. Christine Buurma and Naureen Malik, “Shale Gas Supply Held Hostage by Oilto Drop by Most in a Year”, Bloomberg, July 14, 2015 at http://www.bloomberg.com/news/articles/2015-07-13/accelerating-shale-gas-declines-show-supply-held-hostage-by-oil

30. “U.S. Becomes a Net Energy Exporter in EIA Forecast”, Institute for EnergyResearch, as reported by Canada Free Press, January 14, 2017 at http://canadafreepress.com/article/u.s.-becomes-a-net-energy-exporter-in-eia-forecast


While domestic considerations will have to be weighed against

larger geopolitical goals, there is no doubt that the entry of the US as

a gas producer and exporter has changed the energy landscape. The

biggest beneficiaries from an energy perspective are the large Asian

consumers who were held hostage by the traditional producers.

According to US government estimates, production– particularly from

shale gas– will continue to expand till 2035, despite depressed prices.

In such a scenario, it is almost certain that the US will once again be in

a position to call the shots in the energy markets.

3RUSSIA – MASTER OF THE (ENERGY) GAME

Since the czarist period, the energy sector has been an important part

of the Russian empire. Realising its lack of access to technology as well

as capital to exploit its energy assets, the Russian monarchy allowed

foreign companies to invest in the development of the Baku and Volga

oil fields. By the turn of the century, the Russian Empire was producing

31 percent of global oil exports.1 On the other hand, the roots of Russia’s

gas industry were created in 1965 when the USSR decided to place

greater emphasis on gas production and consumption.2 During the

Soviet era, the Kremlin leveraged its energy resources to expand its

power across its immediate neighbourhood in order to create buffers

against other powers, and energy exports accounted for half of Soviet

export earnings.3 This influx of capital was, and continues to be,

instrumental in helping Russia build its military and industrial basis,

which is critical for maintaining its status as a regional and indeed a

global power. Hence energy resources are viewed as both a tool and a

means to achieve not only the governments’ economic but also security

and political goals. The revenues from oil and natural gas exports

empowered the Kremlin to consolidate its hold over the Soviet Empire.

1. Lauren Goodrich and Marc Lanthemann, “The Past, Present and Future ofRussian Energy Strategy”, Stratfor Global Intelligence, February 12, 2013 at https://www.stratfor.com/weekly/past-present-and-future-russian-energy-strategy

2. Roman Kupchinsky, “Russia: Gazprom –A Troubled Giant”, Radio Free EuropeRadio Liberty, January 05, 2006 at http://www.rferl.org/a/1064448.html

3. Lauren Goodrich and Marc Lanthemann, no. 1.


The Russian government has control of developments in the energy

sector through commanding stakes in key energy companies.

The energy sector also contributes to Russia’s ability to expand its

influence to its immediate neighbourhood. Moscow’s use of energy as

leverage varies from controlling regional energy production (as it did

in former Soviet states) to subsidising cheap energy supplies to these

countries as well as controlling the energy transport infrastructure.

With its low cost of labour, Russia was able to sell its oil at subsidised

rates to its Soviet satellite states and from thereon to Western European

countries, which also strengthened its position in its own periphery.

After the break-up of the Soviet Union and the loss of status as a

superpower, Moscow continued to use its vast energy resources, mainly

to earn revenues. However, it was not until Vladimir Putin took over

the helm of the government in 2000 that energy became a major

strategic factor in Russia’s foreign policy. After re-nationalising some

strategically important sectors of the economy, including the oil and

gas companies that had been privatised during the post-Soviet Yeltsin

era, Putin focused on the nation’s energy policy. It is interesting that

although Putin wrote his dissertation on basing Russia’s domestic and

foreign policy on the development of its energy resources prior to

becoming President, many of the policies that were followed

subsequently reflect his theories on how to shape the country’s energy

sector, from extraction to development and export.4

Since then, Russia has been using its energy resources to further

its foreign policy goals in by importing oil and natural gas from the

former Soviet Republics at a discount and exporting them to other

countries at higher prices; ensuring that the routes of the – mainly

natural gas – pipelines go through its own territories or transit only

friendly countries; and third, using this monopoly over its vast supply

network to influence foreign policy decisions in these countries that

are in Russia’s national interests.

To a large extent, Russia succeeded in using its energy strategy

4. V. V. Putin, “Mineral and Raw Materials Resources and the DevelopmentStrategy for the Russian Economy”, Putin’s Thesis (Raw Text), translated byThomas Fennell, The Atlantic, 2008 at https://www.theatlantic.com/daily-dish/archive/2008/08/putins-thesis-raw-text/212739/

Russia – Master of the (Energy) Game 45

effectively to further its national interest. For example, the gas sector

was left out of the sanctions regime that was imposed on several other

sectors of the economy – including the oil sector – after Russia’s

annexation of Crimea in 2014. However, both the former Soviet

Republics, as well as Russia’s European client states have been

attempting to reduce their dependence on Russian energy supplies by

pursuing gas infrastructure projects. In October 2014, Lithuania

launched its Project Independence – a floating LNG storage and

regasification unit, owned by Norway’s Statoil – to be moored in the

port of Klaipeda, and supplied with gas from non-Russian sources,

including possibly American LNG in the future. Eventually, the project

proposes to hold sufficient capacity to meet around 90 percent of the

gas demand of the Baltic states of Lithuania, Latvia and Estonia. This

is only the first step in the EU’s list of projects to wean itself away

from dependence on Russian gas supplies. Poland too opened its first

import terminal in 2015, while Bulgaria, which also buys close to 90

percent of its gas from Russia, stating that supplies of US gas could

arrive via Greek LNG facilities.5

However, following the US shale revolution, the subsequent price

fall and the looming possibility of US LNG entering the European

market has seen Russia facing the biggest threat since it re-emerged as

an energy superpower post-2000. Today, Russia is scrambling to retain

– and diversify – its markets, not only for economic reasons but also

to retain its leverage in a region it considers vital for its survival and

power.

The Russian Gas Sector

Russia has one of, if not the largest gas reserves in the world. According

to the Oil and Gas Journal, Russia has 1,688 trillion cubic feet (tcf) or

47.7 trillion cubic metres (tcm) of gas reserves as of January 1, 2013,

accounting for about a quarter of the world’s total proven reserves.

5. Petrras Vaida, “LNG terminal – guarantor of Lithuania’s energy security”, TheBaltic Course, October 23, 2014 at http://www.baltic-course.com/eng/energy/?doc=97991, and Georgi Kantchev, “With U.S. Gas, Europe Seeks Escape FromRussia’s Energy Grip”, The Wall Street Journal, February 26, 2016 at http://www.wsj.com/articles/europes-escape-from-russian-energy-grip-u-s-gas-1456456892


The majority of these reserves are located in Siberia, with the Yamburg,

Urengoy, and Medvezh’ye fields alone accounting for more than 40

percent of its total reserves, with other significant deposits located in

the northern part of the country.6

The state owns the majority of the gas with the state-run Gazprom

controlling more than 65 percent of reserves and additional reserves

being controlled through joint ventures with other companies. The

company produced about 74 percent of the country’s total output.

Although independent producers have gained importance recently,

and are contributing increasing volumes to the country’s production,

upstream opportunities remain fairly limited for them. Gazprom’s

domination of the gas sector is further ensured by its monopoly on

Russian gas exports through its vast pipeline network. Although the

government has stated that it would allow independent producers to

export by 2014 by allowing third-party access (TPA) to the domestic

pipeline network, actual changes have not occurred.

There are currently 10 major pipelines in Russia, eight of which

are for export. These include the Yamal-Europe I, Northern Lights,

Soyuz, Bratstvo, and Nord Stream pipelines, all of which carry Russian

gas to Eastern and Western European markets via Ukraine, Belarus,

and across the Baltic Sea. Three other pipelines, viz., Blue Stream, North

Caucasus, and Mozdok-Gazi-Magomed, connect Russia’s production

areas to Turkey and the former Soviet Republics in the east. Following

the Ukraine crisis, Russia is now shifting focus to another pipeline –

the South Stream pipeline – that envisages transporting 63 bcm of gas

per annum under the Black Sea to Central Europe via Bulgaria and

Serbia, avoiding Ukrainian territory. The project was abandoned by

Russia in 2014 after the former Bulgarian government decided not to

issue construction permits for its exclusive economic zone in the Black

Sea, possibly under pressure from the EU. The Bulgarian government

has said that it would revisit the project after elections scheduled to

be held in March 2017.7

6. “Russia”, US Energy Information Administration, Department of Energy, March12, 2014 at http://www.eia.gov/countries/analysisbriefs/Russia/russia.pdf

7. “South Stream ‘Could Be Revisited’ after Bulgaria Election - Hungary FM”,Novinite.com, Sofia News Agency, February 28, 2017, http://www.novinite.com/articles/179063/South+Stream+’Could+Be+Revisited’+after+Bulgaria+Election+-+ Hungary+FM


Russia also produces and exports LNG, the majority of which is

exported to Japan and South Korea, as well as China and Taiwan under

long-term supply agreements from Sakhalin. Although additional

trains have been planned between 2017 and 2018, these would require

other sources of gas in addition to the existing fields, some of which

are in the environmentally, economically and technologically

challenging Arctic region. There are a number of proposals in various

stages of planning including the construction of new LNG terminals.

Interestingly, these projects will include independent companies such

as Novatek and Total as partners.8

Natural Gas Exports as a Strategic Tool

For Russia, while its oil is used mainly to earn revenue, its vast natural

gas resources are used both as an instrument and a means to achieve

economic as well as security and political goals. This became most

evident in the mid-2000s, when Moscow terminated gas supplies to

Ukraine after Kiev began becoming increasingly oriented towards the

West following the Orange Revolution in 2005. As a key transit country

for Russian gas exports to Western Europe, Ukraine’s apparent

leveraging of its position by demanding higher transit tariffs was seen

as going against Russian interests. Moscow therefore demanded Kiev

pay market-driven prices as against the subsidised gas prices offered

earlier. The dispute reached a climax in January 2009 when Russia

terminated gas exports to Europe for two weeks, thereby depriving

south-eastern Europe of gas in the middle of winter. The issue was

resolved after prices were renegotiated, but it impaired Russia’s

reputation as a reliable supplier.

In a similar case, in 2010, Russia also cut off gas to Belarus, after its

President Alexander Lukashenko, refused to join a Belarus-

Kazakhstan-Russia customs union being championed by Vladimir

Putin, who was prime minister at the time, as well as demanding duty-

free Russian oil as the price of further cooperation. He also gave refuge

to Kyrgyz leader Kurmanbek Bakiyev, ostensibly against the Kremlin’s

wishes. However, once again the apparent dispute was over reviewing

subsidised gas prices provided to Belarus by Russia. Eventually, the

8. Ibid.


dispute was settled after Russia acquired a larger share in the country’s

energy infrastructure, and thereby further control, in exchange for

continued discounted gas.

Although couched under the garb of price revisions, the gas cut-

offs were aimed at inflicting punishment for these countries’ policies

of trying to move closer to the West. Although both disputes were

settled on Russia’s terms, they served to impair Russia’s credibility as

a reliable supplier, hastening the resolve of European customers to

diversify their energy supplies away from Russian dependence.

More recently, Russia’s surprising involvement in the Syrian

conflict has also been attributed to its strategy to prevent rival

producers from providing European customers with alternative gas

supplies. Since 2009, following Qatar’s proposal to build a pipeline to

send its gas to Europe through Turkey and Saudi Arabia transiting

Jordan and Syria, Russia imposed pressure on President Assad to reject

the same. Similarly, an Iranian proposal in 2011 to construct the Iran-

Iraq-Syria pipeline, which was slated to be finished in 2016, has also

been held up, first due to the ‘Arab Spring’ and now due to the conflict

in Syria. Although Moscow is more amenable to the Iranian proposal,

Qatar’s involvement in Syria is believed to have been a factor in its

decision to enter the Syrian conflict.9

According to European Parliament data, in 2013 Russia provided

43.2 percent of the European Union’s gas imports, 31.38 percent of its

oil imports, and 26.7 percent of its coal imports.10 However, according

to other data, Europe’s dependence on Russia is much lower now with

Russia supplying 27 percent of the overall European natural gas market

and supplying over 90 percent of the gas consumed in Eastern Europe.11

Be that as it may, as the Russian government became dependent on

9. Mitchell A. Orenstein and George Romer, “Putin’s Gas Attack: Is Russia Just inSyria for the Pipelines?” Foreign Affairs, October 14, 2015 at https://www.foreignaffairs.com/articles/syria/2015-10-14/putins-gas-attack

10. Tara Shirvani, “The Dash for Gas How Iran’s Gas Supply Can Change theCourse of Nuclear Negotiations”, Harvard International Review, Vol. 36, Issue 3,Spring 2015.

11. Amy Myers Jaffe, Kenneth B. Medlock III and Meghan L. O’Sullivan, “China’sEnergy Hedging Strategy: Less than meets the eye for Russia Gas Pipelines”,NBR Energy Security Program, February 9, 2015 at http://www.nbr.org/research/activity.aspx?id=530


energy revenues, it also became a liability, as with oil and gas exports

to Europe accounting for almost 52 percent of Russia’s federal budget

income, Russia is as dependent on the European market as the

Europeans are on Russian supplies. Moreover, although its monopoly

over Europe’s gas supplies facilitated Moscow to develop a sphere of

influence, it came at a cost as low revenues did not allow it to develop

its depleting fields as efficiently as was required. Many of Russia’s older

and larger fields are in long-term decline and production is coming

mainly from smaller and more expensive and less accessible fields. As

a result, maintaining oil production in Russia would require an infusion

of new technologies, without which oil production in Russia will begin

to decline from 2016-2017.12 Moreover, Russia is facing a financial

crunch due to the drop in oil prices since mid-2014, along with the

Western-imposed sanctions over the Ukraine crisis. Between June 2014

and January 2015, the price of Russian oil fell from $113.70 a barrel to

$46.05 per barrel – a drop of nearly 60 percent. Gas prices too have

dropped, albeit not as much as oil.

Policies to Retain Markets

Global and regional circumstances have changed to the point that

Moscow has had to prioritise one of the two uses of its energy industry

– and it has unequivocally decided to maintain its revenue-generating

capability. The Kremlin has begun crafting a set of policies designed to

adjust the country to the changes that will come in the next two decades.

According to the Russian State Energy Strategy (which sets out the

country’s energy policy), “the creation of oil and gas industrial

complexes in the east of the country that should allow the regions not

only to become independent of outside energy and hasten their

development but diversify exports flows to Asia-Pacific countries” has

become an important pillar of Russia’s energy policy.13

12. James Henderson and Ekaterina Grushevenko, “Russian Oil Production Outlookto 2020”, The Oxford Institute for Energy Studies, Energy Insight 3, February2017, https://www.oxfordenergy.org/wpcms/wp-content/uploads/2017/01/Russian-Oil-Production-Outlook-to-2020-OIES-Energy-Insight-benefactor-advance-copy.pdf

13. Tatiana Mitrova, “Looking East Amid a Crisis to the West: Russia’s ExportStrategies,” interview by Laura Schwartz, National Bureau of Asian Research(NBR), September 9, 2014 at http://www.nbr.org/research/activity.aspx?id=483


The next decade will be critical for the Russian natural gas industry

with its future prosperity depending to a large extent on the

government’s pricing and policies. However, it is the gas sector which is

crucial as Russia is bound to the European gas market due to its pipeline

network which cannot be re-routed to other markets due to the lack of

necessary infrastructure. With the domestic market being over-supplied

due to increased competition and demand stagnation, frozen regulated

prices, and Rouble depreciation because of sanctions imposed by the

Western countries following the annexation of the Crimean peninsula,

the investment climate has been rendered unattractive. The situation

has been exacerbated further as a result of depressed oil and gas prices.

Moreover, with weak demand in Europe and the Commonwealth of

Independent States (CIS), and traditional export markets (Europe)

looking to diversify their supply sources in a bid to reduce their

dependence on Russia, the industry faces a bleak future, and will affect

revenue earnings. For example, in Europe, Gazprom’s exports came

down by 15 percent in the third quarter of 2014 compared to third

quarter of 2013 – from 40 billion cubic metres to 34 billion – which

translated into a decline of $2.2 billion from the European market.14

Nevertheless, Gazprom remains the largest single gas supplier to

Europe, and supplies about 30 percent of its needs; on the other hand,

Europe comprises 76 percent of Russia’s gas market. Hence, although

the European market is crucial for the Russian economy, it needs to

capture new markets to compensate for stagnating demand in Europe,

as well as withstanding political pressure and Western-led sanctions

emanating out of the Ukraine crisis. Despite the recently signed $400

billion gas supply deal with China, the project can only pay dividends

– if at all – in the medium term, and depends on several factors which

will be discussed below.

First, Russia plans to retain its position in the face of the growing

threat from the US shale revolution by increasing its gas extraction

significantly by developing new fields. Although the short and long-

term forecasts are much more modest than those made in 2009, Russian

14. Paul Roderick Gregory, “Russia’s Natural Gas Sales Plummet: Is Russia CaptiveTo European Buyers?”, Forbes, December 24, 2014 at http://www.forbes.com/sites/paulroderickgregory/2014/12/24/russias-natural-gas-sales-plummet-is-russia-captive-to-european-buyers/


gas production is planned to increase to the level of 739-770 bcm per

year within five years, to 785-842 bcm by 2025, and to 860-936 bcm

after 2034 from 444 bcm in 2014.15 Furthermore, the IEA expects an

increase in gas production, from more than 660 bcm per year by 2020

to more than 800 bcm after 2035. However, maintaining a high level

of production and significant growth in forthcoming years will be a

key challenge given the rate of depletion in its older fields.

Second, given its recent contentious relations with transit states

particularly Ukraine, Russia is moving to find alternative routes

bypassing these states. Moscow dropped its $40 billion South Stream

pipeline project via Bulgaria to Europe in December 2014, on the

grounds that it was blocked by EU regulations, and had opted for the

Turkish Stream project instead. After it offering Ankara a price cut,

Moscow announced that the Turkish Stream would replace the South

Stream project. Although the negotiations were suspended, due to the

crisis in bilateral relations following the downing of a Russian jet by

Turkey in Syria in November 2015, a decision was made to resume the

project after talks held between Turkish President Tayyip Erdogan and

President Putin in August 2016. According to a Gazprom release, a

contract to build the second string of the Turkish Stream’s offshore

section, was signed on February 20, 2017.16

Third, although it intends to retain its lucrative European market

share by expanding natural gas discounts formerly reserved for

strategic partners such as Germany or Italy to other customers, it is

looking at diversifying its market eastwards by developing linkages

with the growing East Asian energy markets.17

15. Zuzanna Nowak, Jaros³aw Cìwiek-Karpowicz and Jakub Godzimirski, “Thepower to influence Europe? Russia’s grand gas strategy”, Natural Gas Europe,March 12, 2015 at http://www.naturalgaseurope.com/the-power-to-influence-europe-russias-grand-gas-strategy-22678 and Caroline Copley and VladimirSoldatkin, “Russia’s Gazprom warns EU over gas, Ukraine”, Reuters, April 13,2015 at http://www.reuters.com/article/2015/04/13/us-russia-crisis-gas-europe-idUSKBN0N41ED20150413

16. South Stream Transport BV, Allseas Group sign construction contract for secondstring of offshore section, New Europe, February 22, 2017, https://www.neweurope.eu/article/russia-inks-second-turkish-stream-pipe-offshore-construction-contract/

17. Note 1.


Fourth, with its mature oil and gas fields in decline, Russia urgently

needs to develop new reserves, including those in the Arctic, to not

only retain its market share but also to meet supply agreements signed

recently with China.

Finally, it is reviewing its earlier plan to expand LNG exports to

Asia due to the fall in oil prices. Given that Russian gas prices are

indexed to oil, this would have an impact on not only LNG prices and

is once again focusing on increasing pipeline exports, including to

Asian clients, including the pipeline to China, and is negotiating with

India for piping gas through China.

The US and EU sanctions, limiting the availability of finance for

Russian energy companies and threatening the possibility of an

embargo on LNG technology, have accelerated both a move into the

Asian market by Russian companies and a shift away from Russian

LNG to pipeline gas projects. The signing of the 38 bcm per year

pipeline contract with the Chinese company CNPC in 2014, with the

possibility that a second contract could be signed in 2015 for 30 bcm

per year via the Altai pipeline, would mean that – adding in existing

LNG deliveries from the already operational Sakhalin LNG project –

Russia could be delivering over 80 Bcm/year of (mainly pipeline) gas

to Asia (but mainly to China) by the early 2020s.18

Diversifying Markets

Europe Still a Coveted Market

Russia’s energy market diversification policy has two strands – one to

seek pipeline export routes to Europe avoiding Ukraine, and the other

to non-European markets, particularly towards the growing Asian gas

market.

Within Europe, in order to diversify away from Ukraine, which is

now perceived as an unreliable transit route, Russia built Nord Stream,

18. Jonathan Stern, Simon Pirani, Katja Yafimava, “Does the cancellation of SouthStream signal a fundamental reorientation of Russian gas export policy?”,Oxford Institute for Energy Studies, January 2015 at http://www.oxfordenergy.org/wpcms/wp-content/uploads/2015/01/Does-cancellation-of-South-Stream-signal-a-fundamental-reorientation-of-Russian-gas-export-policy-GPC-5.pdf


a pipeline carrying Russian gas under the Baltic Sea to Germany.

Another line – South Stream – which was proposed to carry Russian

gas under the Black Sea to Bulgaria and onto central Europe, has been

shelved after the European Commission expressed regulatory concerns

(the EU is now promoting a rival project – the Southern Gas Corridor

– which seeks to bring Azeri gas through Georgia and Turkey to

Europe). Russia responded by announcing Turkish Stream, which

would also bring gas across the Black Sea to Turkey for delivery to

Europe at the Greek border. (see Map 3.1)

During the 1990s, a pipeline across Poland to Germany was built

to cut Ukrainian transit dependence, albeit from 100 percent to 80

percent. This was relinquished in 2001 in favour of a submarine

pipeline (called the Nord Stream) across the Baltic Sea to connect with

Germany directly, as it was Russia’s largest gas market. However, after

the 2006 Ukraine-Russia gas crisis, Russia intensified its diversification

strategy and announced the building of the South Stream project across

the Black Sea, thereby further reducing its dependence on Ukraine.

Following the 2009 crisis, Russia rapidly advanced this project. In

November 2012, the first phase of Nord Stream was commissioned.

At the same time, in December 2012, Gazprom and the other South

Stream partners announced the construction of the first string of the

South Stream project,19 which envisaged transporting up to 63 bcm of

natural gas across the Black Sea into Bulgaria, after which the pipeline

would have been split, with one stream supplying the Balkans and

Austria, and the other eventually supplying northern Italy. However,

after the imposition of sanctions following the 2014 Ukraine-Crimean

crisis, Russia announced in December 2014, that South Stream would

now be abandoned and instead a Turkish route to supply southern

Europe may emerge.20

However, despite attempts, there is limited scope for Europe to find

alternative supply sources before the mid-2020s. Countries in the Baltic

region and south-eastern Europe which are highly dependent on

19. Manfred Hafner, “Russian Strategy on Infrastructure and Gas Flows to Europe”,POLINARES Working Paper No. 73, December 2012.

20. Tim Boersma, “The Cancellation of South Stream is a Pyrrhic Victory, At Best”,Brookings, December 18, 2014 at http://www.brookings.edu/blogs/up-front/posts/2014/12/18-south-stream-pipeline-boersma

The Geopolitics of Gas: Common Problems, Disparate Strategies54M

ap

3.1


Russian gas, are extremely vulnerable to interruptions, and the only

alternative option available for them to reduce imports of Russian gas

is through a combination of LNG supplies and pipeline gas from

Azerbaijan. Central Europe and Turkey could also adopt similar

measures to reduce, but not eliminate, their dependence on Russian

gas. However, it is doubtful whether LNG imports will be able to

replace Russian pipeline supplies. Re-gasification capacity of nearly

200 bcm a year at European LNG terminals was less than 22 percent

utilised in 2013, and although imports may have risen slightly in early

2014, most terminals have substantial spare capacity. The reason for

this is the difficulty of transporting LNG to many of these countries as

well as their competitiveness with respect to Russian gas.21

Although since the early 1980s, North Africa has emerged as

Europe’s second-largest supplier of natural gas, with total exports to

Europe of 44 bcm in 2013, in the short to medium term, an increase in

North African gas exports to Europe appears bleak. Given the region’s

deteriorating investment climate in the aftermath of the political

turbulence in 2010-11, and the surge in domestic gas demand, attracting

new upstream investment will be an uphill task over the coming years.

Hence, even if North Africa does succeed in emerging as a viable

alternative to Russian supplies, it is unlikely that this will happen

before 2020.22

Moreover, till the mid-2020s, European companies are contractually

obliged to import at least 115 bcm per year of Russian gas – which is

around 75 percent of the 2013 import level –with a slight reduction to

around 65 bcm by 2030. Even if long-term contracts are terminated,

projections indicate that a requirement of at least 100 bcm a year of

Russian gas will be required up to 2030, and in some cases, double that

amount. Countries with strong geopolitical reservations about Russian

gas dependence will need to either terminate, or not renew their long-

term contracts with Gazpromon expiry, given that the vast majority of

Russian gas exports to Europe are sold on long-term contracts varying

21. Ralf Dickel et. al., “Reducing European Dependence on Russian Gas:distinguishing natural gas security from geopolitics”, Oxford Institute forEnergy Studies, October 2014, OIES Paper, NG 92 at http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/10/NG-92.pdf

22. Ibid.


from 10-35 years. These contracts, which are legally binding and subject

to international arbitration, contain take-or-pay clauses which require

buyers to pay for a minimum annual quantity of gas, irrespective of

whether they take that quantity. In the post-2008 period, the take-or-

pay level in many of these contracts was reduced from 85 to 70 percent.

Moreover, any attempt to terminate these contracts will result in

substantial additional infrastructure costs for LNG import terminals

and pipeline connections, or investments in alternative energy sources

and/or policies. Hence, European countries have little option other

than carefully managing their relations with Moscow.23

Seeking an Asian Market

Nonetheless, Russia is taking counter-measures by promoting trade

and investment to other regions, mainly Asia. The development of its

energy market and positioning itself as a major energy supplier for

the energy-hungry East Asian markets is a core piece of Russia’s pivot

to Asia. Concurrently, the cutting of Russia-Europe ties and the Ukraine

crisis has been a major catalyst for certain relationships, namely,

enhanced Sino-Russian strategic and bilateral cooperation.

In 2013, President Vladimir Putin announced the intention to pivot

towards the Asia-Pacific region by turning to eastern markets and by

developing the Siberian and the Far Eastern districts, which though

underdeveloped, are rich sources of energy resources and raw

materials. The Putin administration has acknowledged that the global

focus towards the Asia-Pacific region and has made developing the

Russian Far East a top priority of the nation. Russia’s energy strategy

for 2030 forecasts that the Asia-Pacific market will consume 22-25

percent of all Russian exports and 19-20 percent of Russian gas

exports.24 Accordingly, Russia has worked to broaden its energy

outreach to various Asian partners, including Vietnam, Laos, South

Korea, China and Japan. Significantly, China was not a Russian gas

customer until 2013, whereas between 2000 and 2012, the share of oil

and gas in Russian exports to Japan increased from 1 percent to 74

23. Ibid.24. “Energy Strategy of Russia for the period up to 2030”, Ministry of Energy of

the Russian Federation, Institute of Energy Strategy, 2010 atwww.energystrategy.ru/projects/docs/ES-2030_(Eng).pdf


percent. Moreover, in the wake of the Fukushima Daiichi disaster,

Russia promised supplies of LNG, oil, coal and electricity and worked

to accommodate Japan’s high LNG demand. The Sakhalin-2 pipeline

is being developed by Japanese trading companies Mitsui and

Mitsubishi (which together own 22.5 percent) in collaboration with

Gazprom (with a 50 percent plus one share stake) and Shell. The

pipeline provides Japan with about 10 percent of its LNG needs –

making it Japan’s fourth-largest supplier of LNG – and has increased

its exports to Japan exponentially over the past five years. The Japanese

government and private corporations are evaluating importing more

gas from Sakhalin to meet 17-18 percent of Japan’s gas needs and in

addition, Japan plans to build a $13 billion LNG plant in Vladivostok

in collaboration with Gazprom and a group of Japanese companies

known as the Japan Far East Gas Company, which is expected to begin

LNG exports in late 2018 or early 2019 and could account for around

13 percent of Japan’s gas imports. Both countries have also created joint

working groups on issues such as oil and gas.25

However, with its alliance with the US being the centrepiece of

Japan’s security policy, the Ukraine crisis made it difficult for Japan to

maintain relations with Russia at the level prior to the crisis. But

although Japan did go along with the US and imposed sanctions on

Russia, these were less harsh than those imposed by Washington and

the EU, and the Abe government made it clear that it was still interested

in continuing the dialogue with Moscow. In addition to the projects

that are already underway in Sakhalin and Eastern Siberia, a

consortium of Japanese companies has agreed to jointly pursue

exploration, development and production of oil and gas in the Sea of

Japan off Russia’s coast. Japanese media also reported that major

Japanese trading houses were also planning to invest in a $40 billion

natural gas field project on the Gydan Peninsula near the Arctic Ocean

with Russia’s Novatek.26

25. Wrenn Yennie Lindgren, “Energizing Russia’s Pivot: Japan-Russia energyrelations, post-Fukushima and post-Ukraine”, Norwegian Institute ofInternational Affairs (NUPI), Policy Brief 4/2015, p. 4 at https://www.fi les .ethz.ch/isn/188197/NUPI%20Policy%20Brief%204-15-Yennie%20Lindgren.pdf

26. “Putin-Abe summit brings big Japan-Russia economic projects”, The AssociatedPress, December 16, 2016 at http://bigstory.ap.org/article/9695c7bd712e435082e3 b95ee6db3e1b/putin-abe-summit-brings-big-japan-russia-economic-projects


However, the biggest move to capture the eastern market came in

2014 when after 10 years of negotiations, Russia’s Gazprom signed a

historic 30-year $400 billion gas supply deal named the ‘Power of

Siberia’ project, with China’s CNPC in May 2014, which would deliver

38 bcm per annum from 2018. If the deal comes through, and Russia

succeeds in delivering on the deal, Russia would not only have

accomplished its goal of acquiring a large chunk of the world’s largest

gas market, but would also succeed in forming a strategic alliance that

would go far beyond commerce. But with the fall in prices three months

after the deal was signed, may have put a spoke in the deal, as China

will have to contend with paying more for Russian gas than its lower

domestic prices. Although both sides contend that considerations of a

deal of this size were based on long-term considerations that went

beyond short-term market realities, such as pricing, doubts regarding

the deliverability of the agreement persist. For Russia, a foothold in

the Chinese gas market would compensate for any losses accrued from

a reduced European market, while for China, it would strengthen its

strategy to diversify its sea-based energy supply vulnerability. At the

time the deal was signed, the volume of gas to be supplied amounted

to around 20 percent of China’s consumption and 60 percent of its gas

imports.27

Caspian Reserves

Negotiations to establish maritime borders of this landlocked water

body known as the Caspian Sea, have been on for nearly two decades,

with all the littoral states, namely, Russia, Iran, Kazakhstan,

Turkmenistan and Azerbaijan making many proposals and counter-

proposals, with no solution that is agreeable to all five states in sight.

The Caspian Sea’s importance lies in the huge energy resources, which

is projected to be around 48 billion barrels of oil and 8.7 trillion cubic

metres of gas in proven or probable reserves, both in offshore deposits

and in onshore fields, although many of these figures are disputed.

Most of the natural gas fields are located onshore in Turkmenistan,

Kazakhstan and Uzbekistan, as well as offshore Azerbaijan, although

27. Pierre Noel, “The Power of Siberia natural-gas project: commercial or political?”IISS, January 30, 2017 at https://www.iiss.org/en/politics%20and%20strategy/blogsections/2017-6dda/january-7f20/power-of-siberia-2a1d


Russia and Iran also have sizeable natural gas deposits. Till the break-

up of the Soviet Union, the Caspian Sea did not emerge as a major

arena of dispute, as any exports were dependent on the Soviet pipeline

network.

But following the emergence of the Central Asian states in 1991,

three of the former Soviet states, namely, Kazakhstan, Turkmenistan

and Azerbaijan, also became littoral states bordering the Caspian Sea.

Given the potential of the energy resources in the Caspian, the newly

independent states also demanded a share of the resources. Encouraged

by the US, which saw in the development of the Caspian’s energy

resources an opportunity for an alternative energy source from the

Persian Gulf, as well as a means to wean the former Soviet states away

from Moscow’s influence the region, the newly independent states

began asserting their stakes in the Sea. But under the 1921 Friendship

Treaty signed between Iran and the USSR, which divided the Caspian

between these two states, no changes could be made in the treaty without

the agreement of all littoral states. While Russia and Iran consider this

treaty valid, Azerbaijan, Kazakhstan, and Turkmenistan – none of which

were signatories – did not feel bound to it. (see Map 3.2)

Another controversy over the Caspian was whether it should be

classified as a lake or a sea under the United Nation’s Convention on

the Law of the Sea (UNCLOS). As a lake, each littoral state would be

entitled to an exclusive zone for a given number of miles from its shore,

but the centre of the Caspian would be a shared zone for all littoral

states. On the other hand, if it was declared a sea, the entire Caspian

would be divided according to each state’s coastline. While Russia and

Iran designated the Caspian a lake, the three new states defined it as

a sea.

In the mid-1990s, the US proposed the construction of a project to

import natural gas from Turkmenistan through a sub-sea pipeline. As

a result, in 1999, the Turkmen government entered into an agreement

with some American companies for a feasibility study on the proposed

pipeline, and signed a number of agreements concerned with pipeline

construction. However, opposition from Russia and Iran as well as a

gas discovery on Azerbaijan’s Shah Deniz field, shelved the project.

While some pipelines carrying oil from the Caspian, namely the


ap

3.2


Caspian Pipeline Consortium and the Baku-Novorossiysk pipeline

were constructed in 2001 and 2010 respectively, Caspian gas moved to

Western Europe through a combination of Soviet-era and newly

constructed pipelines.

The South Caucasus Pipeline (SCP) runs parallel to BTC and

supplies natural gas to Georgia and Turkey from Caspian fields. The

pipeline began operating in 2007 and has the capacity to transport

about 280 bcf (7.9 bcm) of natural gas, according to IHS Global Insight.

In 2010, the daily supplies of SCP averaged 180 bcf (5.00 bcm) of natural

gas, according to BP.

Exports to South Asian Markets

India and Pakistan have also seen the energy demand rise, and for

several decades a consortium of countries has planned to construct a

pipeline that runs from Turkmenistan to India. This would allow

Turkmenistan to supply to the growing South Asian markets and

diversify its natural gas exports.

According to Oil and Gas Journal, the proposed Turkmenistan-

Afghanistan-Pakistan-India (TAPI) pipeline would run approximately

1,050 miles – 90 miles will be in Turkmenistan, 460 miles in

Afghanistan, and 500 miles in Pakistan, bringing it to the Indian border.

The pipeline would have a 1 tcf (0.02 tcm) capacity. India and Pakistan

will each get approximately 42 percent of natural gas pumped through

TAPI, with the rest going to Afghanistan.

Despite the stalemate over the definition, all the states have

undertaken oil and gas exploration and drilling. Russian and Iranian

claims stemming from the treaty are becoming weaker and weaker with

each passing year, though the issue is far from settled. In July 2001,

Iran deployed a warship and two fighter jets to stop an Azeri research

vessel exploring a gas field near the centre of the Caspian, but well

within what Azerbaijan considers its territorial waters. Even though

Russia agrees with Iran on the issue of Caspian ownership, it has not

taken such drastic measures. Also, despite the Friendship Treaty, Russia

has proven willing to make bilateral deals with other states, such as,

the one in 2005 under which it signed a production sharing agreement

with Kazakhstan for that country’s Kurmangazy offshore oilfield,


situated on the northern part of what is generally agreed to be

Kazakhstan’s Caspian sector.

Russia provides 90 percent of Western Europe’s gas and the

majority of its oil. Whereas gas and oil must currently flow through

Eastern Europe to reach the West, Russia is in the process of

constructing the Nord Stream, a gas pipeline that will extend from

Vyborg (near St. Petersburg) under the Baltic Sea and into Greifswald,

Germany. By bypassing Eastern Europe, Russia will be freed from

transit fees, but more importantly, it will have full vertical control of

its gas, from drilling to sales.

Russia considers Central Asia to be firmly in its sphere of influence,

and would loathe losing any of its influence in the area and the benefits

– especially the economic ones – which would accrue. Also, by

combining the sizeable Central Asian reserves with its own, Russia

could become a petroleum power to rival the Middle East. Just as in

the 20th century, the USSR relied on its military for its superpower

status, in the 21st century it will rely on its oil and gas.

Out of the four countries being discussed in this chapter, only

Russia has a completed, operational pipeline – the Caspian Pipeline

Consortium (CPC), which started transporting oil in 2001. It runs from

Kazakhstan’s Tengiz fields to the Russian Port of Novorossiysk and is

the largest current export route of Caspian oil, carrying 34 million

tonnes of oil every year. There is talk of almost doubling capacity to

67 million tonnes a year by adding 10 new pumping stations. An

example of the complicated nature of the geopolitics of oil in the region

is the fact that the CPC has varied shareholders: Russia holds 24

percent, Kazakhstan 19 percent, Chevron 15 percent, and Oman 7

percent. A variety of oil and gas companies make up the remainder.28

In addition to Kazakh oil, the CPC also exports for major Russian

producers such as Lukoil, Rosneft, Surgutneftegaz, and TNK-BP.

There is no major pipeline to export Caspian gas, and interestingly

enough, Russia has shown no inclination to fill this need. Any Caspian

28. Alla Afanasyeva & Vladimir Soldatkin “CPC pipeline oil exports down 7 pctin Jan, m/m, Reuters, February 1, 2017, http://af.reuters.com/article/energyOilNews/idAFL5N1FM4TM


gas pipeline would also likely need to connect to Turkmenistan to take

advantage of that country’s massive gas reserves. However, President

Niyazov proved himself an unreliable negotiating partner, evidenced

in the planning of the American-sponsored Trans-Caspian Pipeline

(TCP). Nevertheless, Russia’s involvement in the region’s natural gas

markets would be a prudent move, since control of Caspian gas as well

as its own, would cement Russia’s position as the world’s pre-eminent

gas supplier. During recent talks concerning a possible Russian-led gas

OPEC, one of the experts’ criticisms of the idea was that Russia already

has such massive reserves that forming such a cartel might be

unnecessary. While this is debatable, by obtaining control over Caspian

gas, Russia should be able to completely put itself in a position to

effectively determine and manipulate the world’s natural gas market

as it sees fit.29

Challenge to Retain Leadership

Despite the unlikely scenario of Europe moving away from dependence

on Russian gas, there have been some concerns that the advent of the

US shale gas revolution and the resultant increase in gas, mainly LNG

supplies, will have an impact on Russia’s markets. Even if US LNG

does not enter Europe in large quantities, it would nevertheless have

an indirect impact on energy costs and security, as with US cutting

down its gas imports, much of US-bound supplies have increased

global supplies thereby pushing prices down in markets, including in

Europe.

Any capacity addition would enable Europe to increase its leverage

in future price negotiations with Moscow. A similar effect was seen

when the US shale boom took place over the last decade.

Moreover, with the price of US gas being lower than those available

to Europe and Asia since 2009, has seen an increase in short-term

supply contracts and spot trade of LNG as they offer buyers the ability

to fill supply shortfalls at competitive prices. Moreover, Washington

29. James Fishelson, “From the Silk Road to Chevron: The Geopolitics of OilPipelines in Central Asia”, School of Russian and Asian Studies, December12,2007 at http://www.sras.org/geopolitics_of_oil_pipelines_in_central_asia


has been intensifying its efforts to enter the European market and replace

Russia as one of the EU’s largest energy suppliers, both for economic as well

as geopolitical gains. Particularly, following the recent Russia-Ukraine

conflict, the US and Western strategists have been trying to find a

replacement for Russian energy supplies to Europe.

However, in the long run, there will be only a marginal difference

between US LNG export prices to Europe, making it difficult to

compete with Russian pipeline supplies on price. Moreover, if the

prices are too low, US shale gas will not be able to match the operational

costs of traditional European suppliers, including Russia. With

European gas prices indexed to oil prices, and no upward movement

expected in the near future, hub-based US gas may not be as

competitive as expected.

Meanwhile, Russia is fighting to retain its dominant position in its

traditional market, besides diversifying to new ones. It is planning to

increase its gas production significantly within five years by

developing new fields in order to recapture its leading position from

the United States. On the other hand, some projections indicate gas

production will go up as Russia is pushing a number of multi-billion

dollar oil and gas projects, particularly in its Far East and Arctic regions.

Among its most promising projects are the new fields on the Yamal

peninsula, which currently provides only small quantities, but are

projected to produce more than 100 bcm per year from 2020 and 200

bcm from 2035. It is also planning to increase production from its

Eastern Siberian and Far Eastern regions, where the annual increase is

estimated to rise from the current 7 bcm and 30 bcm, to 89 bcm and 94

bcm, respectively, by 2035. While production from Yamal will be for

the European market, gas from Eastern Siberia will be exported to

Asian markets. Moreover, it plans to construct an LNG plant in Yamal,

and the Altai pipeline that will help Russia redirect some of the gas

from Western Siberia to China.30 While there are doubts about Russia’s

ability to deliver given its current economic stress, partly due to the

30. Zuzanna Nowak, Jarosaw Æwiek-Karpowicz and Jakub Godzimirski, “Russia’sGrand Gas Strategy – the power to dominate Europe?”, Energy Post, March 25,2015 at http://www.energypost.eu/russias-grand-gas-strategy-power-dominate-europe/


sanctions imposed after the Crimean crisis and partly due to the fall

in oil – and gas – prices, the fact that its gas trade is not only linked to

its energy security policy but has a strategic component, where its

energy resources are viewed as both a tool and a means to achieve

security and political goals, it is unlikely that Russia will give up its

markets without a fight.

4IRAN RE-EMERGES AS A POTENTIAL

GAS SUPERPOWER

After more than two weeks of negotiations, Iran and the P5+1 namely,

the US, Russia, China, the UK, France and Germany, announced on

July 14, 2015 that they had reached a Long Term Joint Comprehensive

Plan of Action (JCPOA) which would scale back Iran’s nuclear

capabilities for more than ten years. In return, the P5+1 committed to

significant easing of the sanctions on Iran’s energy (mainly oil) and

banking sectors, albeit only after the IAEA issued its final report,

scheduled for December 2015, verifying Tehran’s compliance with the

obligations under the JCPOA. Although Washington cautioned that

the sanctions could be re-imposed if Iran went back on its pledge or

did not adhere to the terms of agreement, the agreement set the ball

rolling for unravelling of the sanctions that had taken a huge toll on

the country’s economy, signalling the return of Iran to the international

community. Already, reports of contracts with European and Asian

firms being signed are emerging, but even as some American

companies were said to be getting ready to head back to Iran, the new

US administration under President Donald Trump imposed sanctions

on dozens of Iran-linked individuals and entities following an Iranian

ballistic missile test, which include financial and banking sectors and

will freeze the US assets of the entities, both Iranian and others, that

have assisted Iran’s programme, with threats of more sanctions to

follow. However, the new sanctions did not mention the nuclear deal

Iran Re-emerges as a Potential Gas Superpower 67

and therefore does not have a bearing – at least at the time of writing

– on non-US companies interested in Iran’s energy sector. However,

Iran will have to overcome several challenges before it can resume its

status as a leading energy producer and exporter. More importantly,

Iran’s return occurred at a time when the energy market is over-

supplied.

Background

The experience of years of interference, political manipulation and

military intervention by Western powers and the resultant deep

resentment this generated towards foreign governments has, to a large

extent, contributed to successive Iranian leaders – both pre- and post-

revolution – mistrusting foreign entities. This in turn is reflected in

political sensitivity in dealings with the energy sector, which is not

only a symbol of national pride and sovereignty, but also a vital source

of revenue for Iran. From the granting of the oil production concession

to William Knox D’Arcy in 1901 in which the British government

played a role by providing political support in order to prevent the

Russians from acquiring it, and the subsequent sale of the concession

to Burmah Oil, which was later incorporated into the Anglo-Persian

Oil Company (later known as Anglo-Iranian Oil Company, then British

Petroleum and eventually BP) in 1908, the British government, which

held the majority shareholding, benefited more from the concession

than did Iran.1 This was followed by the signing of the Anglo-Persian

Agreement in 1919, the negotiations of which were kept secret and

which gave the Anglo-Persian Oil Company guaranteed access to

Iranian oil fields, although in effect, it gave control to the British

government control over the financial and military affairs of Iran,

thereby turning Iran into a buffer state between Russia and British

colonies in the Middle East and its “jewel in the crown”, India.

Following the overthrow of Ahmed Shah, the Persian ruler, by Reza

Shah Pahlavi, the agreement, which was never ratified by the Majlis,

was renegotiated in 1933, and was economically more in favour of Iran,

1. Daniel Yergin, “The Prize: The Epic Quest for Oil, Money & Power”, Free Press,2008, pp. 119-121.


but in reality extended the oil concession for another 60 years.2 Finally,

during the Second World War, the Allied forces forcibly occupied Iran

in 1941, in order to prevent the country – and its precious oil – from

falling into the hands of the Germans. Thereafter, following the

abdication of Reza Shah and the succession to the throne by his son

Mohammed Shah Reza, Britain’s control over the country increased,

which led to increased resentment by the Iranians against both the Shah

and the Westerners.

However, the incident which perhaps reflected the deep anger and

resentment of the people against foreign influence was the 1951

nationalisation of the oil sector under the aegis of the nationalist Prime

Minister Mohammed Mossadegh, and the subsequent embargo placed

on Iran by the Western powers. In action that was similar to the

sanctions imposed in the 1990s by the US, purchase of Iranian oil was

embargoes, the country’s financial assets were frozen and all export

of goods to Iran were banned. Eventually, in a coup engineered by

Britain’s MI6 and the US’ Central Intelligence Agency (CIA) in 1953,

Mossadegh was overthrown and Mohammed Shah re-instated.

However, control over the country’s oil sector passed on to the

Americans under a new contract called the Consortium Agreement of

1954, which was perceived by the Iranians to be every bit as exploitative

as its predecessor.3

Finally, in 1979, when the revolution took place, it was seen as an

explosion against decades of exploitation, domination and above all,

humiliation of the Iranian people by foreign powers and the country’s

rulers who were perceived as puppets in the hands of first the British

and then the Americans, but who were equally culpable in looting the

country’s wealth at the cost of the people. It also provides an insight

into the reason for the anti-West policies of the post-revolutionary

government and the climate in which policies with regard to the energy

2. Maysam Behravesh, “Iran and Britain: The Politics of Oil and Coup D’état beforethe Fall of Reza Shah”, e-International Relations, November 9, 2010 at http://www.e-ir.info/2010/11/09/iran-and-britain-the-politics-of-oil-and-coup-d%e2%80%99etat-before-the-fall-of-reza-shah/

3. Elham Hassanzadeh, “Politicization of the Petroleum Industry in Iran’s NaturalGas Industry in the post-revolutionary period: Optimism, Scepticism andPotential”, Oxford Institute for Energy Studies, 2014, pp. 53-57.


sector – which are often perceived as self-defeating – were framed. The

stiff resistance towards private and foreign participation from

conservative elements in the post-revolution political set-up and the

greater state influence over sectoral operations that was initiated

stemmed from the deep mistrust and fear of exploitation and

manipulation by foreign or domestic forces.

However, while the prize coveted by the Western powers and the

international oil companies were concentrated on Iran’s oil riches, more

recently it is the country’s natural gas sector which has come under

the geopolitical lens of the international community. Given that Iran

has the world’s largest natural gas reserves surpassing leader Russia’s

reserves in 2013 according to BP4, the fact that the country’s gas sector

has not engineered the kind of excitement as the oil sector is due to a

number of factors. These include the fact that natural gas has attracted

the energy market’s attention only in the last few decades as the

demand for gas has increased worldwide, particularly in the developed

countries; the country’s fast depleting oil reserves; domestic opposition

to the export of gas, and the difficulty and expenditure involved in

transporting it over long distances, given that Iran does not have access

to LNG technology.5 However, this issue is being addressed with the

Iranian national state company National Iranian Oil Company (NIOC)

conducting negotiations with European and Asian firms to restart

incomplete LNG projects, with NIOC officials stating that the goal is

to complete the projects in the next two years. Russian, French, Chinese

and East European companies are reported to have also shown interest

in the LNG projects.6

More importantly, the sanctions imposed on Iran by the US and

Western powers, which saw oil production dropping from a record 6

million barrels of oil a day (mbd) prior to the Islamic Revolution to 2.8

mbd now due to years of sanctions and underdevelopment of fields,

4. BP Statistical Review of World Energy, June 2016 at https://www.bp.com/content/dam/bp/pdf/energy-economics/statistical-review-2016/bp-statistical-review-of-world-energy-2016-full-report.pdf

5. “Iran in talks to complete LNG projects”, Trade Arabia Business Information,February 1, 2017 at http://www.tradearabia.com/news/OGN_319981.html

6. “Iran shortlists 29 IOCs to bid for upstream oil, gas tenders”, Platts, January 3,2017 at http://www.platts.com/latest-news/oil/london/iran-shortlists-29-iocs-to-bid-for-upstream-oil-26630383


also saw the less developed gas sector starved of the requisite

technology and investment required to capitalise on the vast reserves.

Potential Gas Superpower?

With the advent of shale oil from the US as well as from new sources,

leading to an oversupply of the oil market and the resultant plunge in

prices, the Iranian government has the option of turning to its natural

gas resources to earn revenue, and position itself as a major energy

power player. A section of the government, the moderate section, are

of the opinion that establishing linkages through gas export pipelines

with regional and international markets is a key foreign policy strategy

in order to strengthen its bargaining power in the global political arena.

By making importing countries dependent on Iranian supplies, Iran

would be in a position to have the advantage in future negotiations.7

In fact, one of the main reasons for pushing for the gas pipeline project

to Pakistan and India (IPI) was to maintain its relevance as a major

energy supplier in the international energy market.

Nevertheless, given the condition of the energy sector – both oil

and gas – it will not be easy. Not only did the 1979 revolution as well

as the eight-year long war with Iraq from 1980-88 damage the oil and

gas fields, the contracts that were offered on payback terms were not

sufficiently attractive for the international oil majors with the requisite

technology to invest. Despite some reforms being introduced in the

early 2000s, the sanctions remained a deterrent for IOCs to return to

Iran.

According to some experts, the impact of political forces on the

energy sector has proved as detrimental as the sanctions. Moreover,

there is a tendency to treat all information about the country’s energy

resources as confidential.8 As a result, the few contracts that were

signed were either with domestic firms or with other state-owned oil

7. Elham Hassanzadeh, “Natural Gas Allocation Policy and PrioritizationChallenges” in Iran’s Natural Gas Industry in the post-revolutionary period:Optimism, Scepticism, and Potential, Chapter 6, Oxford Institute for EnergyStudies, 2014, pp. 126-130.

8. Elham Hassanzadeh, “Politicization of the Petroleum Industry, Chapter 2 in“Iran’s Natural Gas Industry in the post-revolutionary period: Optimism,Scepticism, and Potential”, Oxford Institute for Energy Studies, pp. 62-63.


companies, rather than with international oil majors. As a result, while

the sanctions starved Iran of investment and technology, the personnel

with technical expertise needed to revive production to the pre-

sanctions level were also not available, as many of the senior technical,

engineering and commercial staff had left. Following the election of

hardline President Mahmoud Ahmedinejad in 2005, political

interference increased in the energy sector, while on the other hand,

relations with the West deteriorated even further, particularly after the

new regime, dominated by conservatives and hardliners, resumed the

uranium enrichment programme in Natanz that had been handled

more diplomatically by the previous reformist regime of President

Mohammed Khatami. Soon after, the United Nations imposed a series

of resolutions between 2006 and 2010 that included punitive sanctions,

while the US and the EU imposed even tougher unilateral sanctions9

which targeted almost every major area of the Iranian economy,

including Iran’s Central Bank and its ability to repatriate oil revenues

as well as many transportation, insurance, manufacturing and financial

sectors. More importantly, while the initial phase of the sanctions –

between 1979-1995 and 1996-2005 – were imposed unilaterally by the

US, the sanctions from 2006-2010 and again from 2010 till the present

time, were imposed by the EU and the UN and included measures

that were even more stringent than those imposed by Washington.10

Prior to 2010, the EU was more conciliatory towards Iran and adhered

to sanctions that were imposed by the UN since 2006. It was only after

the fear that Iranian intransigence could cause an escalation of the

conflict, including an Israeli attack on Iran’s nuclear facilities, which

in turn could cause greater instability in the oil market, that the EU

had to adopt punitive measures. In a series of sanctions from 2010 to

2012, the EU imposed trade and investment restrictions on not only

the oil and gas sector, but also on banking and financial transactions,

9. Shahram Chubin, “The Politics of Iran’s Nuclear Program”, The Iran Primer,US Institute for Peace at http://iranprimer.usip.org/resource/politics-irans-nuclear-program

10. Ali Vaez, “Iran Sanctions: Which Way Out?” The Iran Primer, US Institute forPeace, November 3, 2014 at http://iranprimer.usip.org/blog/2014/nov/03/iran-sanctions-which-way-out


shipping and insurance, and export of major equipment and

technologies.11

But after the election of moderate leader Hassan Rouhani to the

presidency in 2013, which facilitated the lifting of the UN sanctions in

January 2015, the prospects for the return of IOCs into the country’s

upstream sector are looking up. To further attract foreign participants

into its upstream sector, the oil ministry, in November 2015, replaced

the previous buyback system with a new contract model known as

the Iran Petroleum Contract (IPC), which offered better terms for

investors, including improved cost recoveries and up to 25-year

contracts. However, given that the Iranian Constitution clearly states

that the nation’s natural resource reserves cannot be owned by foreign

entities, all foreign oil companies are required to partner with a

domestic firm that is assigned by the ministry.

Despite the new – and improved– contractual terms that are on

offer, only a handful of international energy majors have responded,

albeit tentatively. These include France’s Total, which has teamed up

with China’s CNPC and Iran’s Petropars, Norway’s DNO, and Royal

Dutch Shell, all of which have signed non-binding letters of

understanding with the NIOC. Some Russian companies, namely,

Gazprom, Gazprom Naft, and Lukoil are also reported to have signed

memoranda of understanding for seven oil and gas agreements, along

with other projects such as the construction of a power station and

renovation of a railway.12

Nevertheless, challenges remain. These include a lack of capital,

renewed US sanctions imposed after the new American President

Donald Trump took over office in January 2017, Iran’s infamous

bureaucratic red tape, and most importantly, the forthcoming

presidential elections scheduled for May 19, 2017, wherein the current

incumbent, Rouhani is a candidate, but there are reports that former

president Mahmoud Ahmedinejad may also be in the running. The

11. Elham Hassanzadeh, “The Impact of US and International Sanctions, in Iran’sNatural Gas Industry in the Post-revolutionary Period”, Oxford Institute forEnergy Studies, 2014, p. 74.

12. Mansour Kashfi, “Is A Full Recovery Possible For Iranian Oil And Gas?” OilPrice.com, January 6, 2017 at http://oilprice.com/Energy/Crude-Oil/Is-A-Full-Recovery-Possible-For-Iranian-Oil-And-Gas.html


outcome of the elections will be an indicator of whether Iran will

continue on its current reformist agenda, or if there will be a return to

the previous radical path. If Rouhani wins, then the return of foreign

investments in Iran is almost assured. If not, then Iran will have to

wait a while longer before it can gain its position as a leading gas

producer and exporter.

Market Options

Europe

For years, the sanctions imposed on Iran had only a limited impact on

the country as several countries continued to do business with the

Islamic Republic. However, two factors eventually led Iran to the

negotiating table to thrash out an agreement that would be palatable

to both parties, viz., Iran and the Western countries led by the US –

Iran’s increasing economic problems due, in part, to decades of

sanctions, and the over-supply of oil and gas in the energy market due

to the shale revolution and the consequent fall in oil prices. On the

other hand, for the US, the prospect of energy independence, and the

return of Iran to the international community would allow Washington

more leverage over Saudi Arabia. Moreover, for years, the EU has been

looking for alternative supply options to Russian gas, and Iran has the

wherewithal to become a reliable alternative to Russia as a gas supplier

to Europe. In April 2015, the EU’s Directorate-General for External

Policies published a study of natural gas import options in light of the

Ukraine crisis and concluded that “Iran is a credible alternative to

Russia.”13 Although there is no pipeline network that currently fully

connects the Iranian gas grid to Europe, several options already exist.

It is already connected to Turkey via the Tabriz-Ankara pipeline. This

section transports gas from the South Pars gas field to the city of

Bazargan at the border of Turkey. Iran is strongly bidding for the

continuation of the pipeline network with the construction of the

‘Persian Pipeline’: a 3,300 km network system which crosses Turkey

13. Brenda Shaffer, “A Nuclear Deal with Iran: The Impact on Oil and Natural GasTrends”, Policywatch 2362, The Washington Institute, January 27, 2015 at http://www.washingtoninstitute.org/policy-analysis/view/a-nuclear-deal-with-iran-the-impact-on-oil-and-natural-gas-trends


before reaching Italy where it splits into a northern and southern

section, transporting gas to Germany, Austria, Switzerland, France and

Spain. The capacity of the Persian Pipeline is estimated at around 37-40

bcm per year and would require foreign investments of around

$7 billion. The route would bypass Russian territory and allow the EU

to import 25-30 bcm per year, that is, equal to Russian gas export to

Italy and Germany. Another long-term energy delivery option for Iran

to Europe would be via LNG at an estimated export capacity of up to

10 bcm a year with supply being transported through a pipeline system

to the Omani LNG hub and then shipped via cargos to the

Mediterranean seaports.14

For Iran, entering the European gas market is important. Huge gas

reserves exist in the Iranian sector of the Caspian Sea, which however,

are located in the deepest point of the Caspian and Iran does not have

the required advanced technology for extraction. Therefore, Iran is

eager to attract European energy companies into its energy sector.

Some of the potential routes that are being considered are through

a pipeline that would pass through Turkey which imports about 9 bcm

a year. Iranian gas supplies could be connected with Turkey’s Trans-

Anatolian Pipeline (TANAP) to Europe, although negotiations with the

TANAP consortium have not been held. Russian firms have also

expressed interest in Iran’s gas development projects, with reports that

Gazprom has recently signed a letter of intent with NIGC. Iran too has

welcomed Russian participation in the $2.5 billion construction of a

pipeline known as IGAT-9, a 35 bcm a year line that plans to supply gas

from the South Pars field to Europe via Turkey.15 At the same time, Iran

is also looking at LNG shipment to Europe once they acquire the

technology.

For both sides, this could become a win-win situation. Establishing

14. Tara Shirvani, “The Dash for Gas How Iran’s Gas Supply Can Change theCourse of Nuclear Negotiations” Harvard International Review, Vol. 36, Issue 3,Spring 2015 at http://www.naturalgasasia.com/harvard-business-review-the-dash-for-gas-how-irans-gas-supply-can-change-the-course-of-nuclear-negotiations-15325

15. “Iran hails Russia in Europe gas transfer plan”, Neftegaz RU, January 25, 2017at http://neftegaz.ru/en/news/view/157581-Iran-hails-Russia-in-Europe-gas-transfer-plan


itself as the EU’s long-term gas supplier would be a highly lucrative

avenue worth exploring, particularly as the recent fall in oil prices is

having an impact on the government’s budget. On the other hand, for

the EU, decoupling from Russia’s gas supply monopoly would be

possible by obtaining Iranian gas, thereby solving its main energy

supply dilemma. According to a study by the European Parliament,

Iran’s export capacity is more than 150 bcm per year, which could

eventually rival Gazprom’s export volumes of 140 bcm per year to the

EU.16

Another long-term energy delivery option for Iran to Europe would

be via LNG. Iran is planning to construct smaller LNG production,

including floating LNG (FLNG) units, and hopes to export gas to

Europe, either through Oman or directly as LNG. France’s Total is

reportedly in talks to buy a stake in Iran’s partly-built LNG export

facility and is planning to commit $2 billion to develop the 11th phase

of the South Pars field by the summer of 2017, provided that no new

US sanctions are imposed.17

West Asia

However, the most promising market for Iran is in its own

neighbourhood, viz., the Gulf Cooperation Council (GCC) member-

states. It is one of the fastest growing gas markets and is within

pipeline-reach. Over the years, Iran has been negotiating with several

of its Arab neighbours for the supply of gas. For example, in 2007, it

signed a MoU with Bahrain for the supply of around 10 bcm per annum

of gas starting 2010, through a pipeline across the Persian Gulf.

However, political tensions between the two countries, Bahrain’s close

relations with Iran’s regional rival Saudi Arabia, and the unrest during

16. Tara Shirvani, “The Dash for Gas How Iran’s Gas Supply Can Change theCourse of Nuclear Negotiations”, Harvard International Review, Vol. 36, No. 3,Spring 2015, April 30, 2015 at file:///C:/Users/shebonti/Desktop/book/The%20Dash%20for%20Gas%20How%20Iran%E2%80%99s%20Gas%20Supply%20Can%20 Change%20the% 20Course%20of%20Nuclear%20Negotiations%20_%20 Harvard%20 International %20Review.html

17. Oleg Vukmanovic and Bate Felix, “Total in talks to buy Iranian LNG project:sources”, Reuters, February 27, 2017, at http://in.reuters.com/article/us-total-iran-lng-idINKBN1661NM


the “Arab Spring”, which Manama accused Tehran of supporting,

scuttled the negotiations.18

Iran and Kuwait have also discussed the possibility of gas trade

on several occasions, with both sharing an oil and gas field, which the

Iranian side refers to as Arash, and the Kuwaitis calling it Dorra.

Although a MoU was signed in 2010 to export around 8 million metric

cubic metres per day (mmcmd) of gas from the Iranian side of the field,

negotiations broke down following differences over pricing. Again in

2012, Iran repeated the offer. However, the discovery of gas reserves

by Kuwait as well as hostile relations between the two made any

agreement unlikely.19

Similarly, attempts at signing an agreement with the UAE have also

been unsuccessful, mainly over pricing differences. Moreover, both

countries share strained relations due to a dispute over ownership of

three islands in the Persian Gulf. As a result, an agreement on gas sales

appears remote.

Nonetheless, in March 2014, Iran signed a gas supply deal with

Oman, with whom it shares comparatively warmer relations than with

the other Gulf States. The deal was signed in 2014 after several previous

attempts failed to deliver results, following differences over pricing

and routing of the sub-sea pipeline, stated that Iran will export 10

mcmd of natural gas over 25 years. According to reports, Oman and

Iran have yet to agree on the route of a 260 km sub-sea pipeline which

will carry Iranian gas to Oman. Moreover, Oman produced about 85

mcmd, while consumption was only 39 mmcmd in 2013. It also imports

5-7 mmcmd of gas through the Dolphin system. However, given that

its gas demand is expected to rise over the next few years, and given

that it exports about 10.4 million tonnes of LNG per year (around 39

mmcmd), it may encounter shortages in the future.20 Hence, despite

the delay in commencing operations due to disagreements over price

and American pressure on Muscat to find other suppliers, after the

18. David Ramin Jalilvand, “Iran’s Gas Exports: Can past failure become futuresuccess? Oxford Institute for Energy Studies, NG 78, June 2013.

19. Ibid.20. Dalga Khatinoglu, “Oman’s gas deal with BP not to undermine Iranian gas

import”, Trend News, April 22, 2015 at http://en.trend.az/business/energy/2386443.html


sanctions on Tehran were lifted, both countries renewed efforts to

implement the project. According to recent reports, the two countries

have now agreed to change the route of the undersea pipeline in order

to avoid waters controlled by the UAE. The planned pipeline, which

is expected to be constructed soon and completed in two years, would

connect Iran’s gas reserves with Omani consumers as well as with LNG

plants in Oman that could re-export the gas.21

Another Arab neighbour with which Iran shares warm relations

since the overthrow of Saddam Hussein is Iraq. The two countries

signed an agreement to supply Iranian gas to Iraq in 2013 which was

expected to commence supplying 4 mcmd of gas exports from South

Pars to Baghdad from May 2015, going up to 35 mcmd over the next

two years.22 However, the project had been suspended over security

risks as a result of insecurity in Iraq; but recently, Iran said that it was

ready to start the export of gas once Iraq was ready to pay. Earlier,

Iran had cut electricity supply to Iraq due to late unpaid expenses.23

The South Asian Market

After 2008, following the signing of the civil nuclear deal with the US,

several projects with Iran, including the gas pipeline via Pakistan (IPI)

were put on hold or dropped altogether, ostensibly over differences

over the size of the pipe, pricing and security issues. Instead, India

decided to focus on the US-supported Turkmenistan-Afghanistan-

Pakistan-India (TAPI) gas pipeline project. Now, with the removal of

sanctions looking increasingly possible, that is expected to change.

India’s petroleum and natural gas minister, Dharmendra Pradhan met

with his Iranian counterpart Bijan Namdar Zangenah in the first week

of June 2015 and discussed the possibility of building a gas pipeline

21. “Iran, Oman reaffirm gas export project, change pipeline route to avoid UAE”,Reuters, February 7, 2017 at http://in.reuters.com/article/iran-oman-gas-idINL5N1FS2ZK

22. “Iran to start gas exports to Iraq in a month: Official”, Iran Daily, June 25, 2015at http://www.iran-daily.com/News/118584.html

23. Mahmoud Eskaf, “Iran to start gas pumping to Iraq on Tuesday”, Middle EastObserver, January 22, 2017 at https://www.middleeastobserver.org/2017/01/22/iran-to-start-gas-pumping-to-iraq-on-tuesday/


ap

4.1


from Iran to India through various alternate routes.24 Earlier, the

possibility of direct gas exports to India through an under-sea pipeline,

via Oman, were also being discussed, as well as future LNG exports

to India. However, these are all in the planning stage and the

implementation of such deals will depend largely on the pricing of

gas as well as the demand for gas in India. (see Map 4.1)

Similarly, Pakistan, which despite claims that it would give in to

US pressure, had also put its portion of the IPI project on hold, is now

looking to resume the project – although not necessarily with India.

During Chinese President Xi Xinping’s visit to Pakistan in April 2015,

the possibility of linking the gas pipeline from Pakistan to China was

discussed. According to reports, once the planned project, namely the

China-Pakistan Economic Corridor (CPEC), which aims to connect the

Chinese city of Kashgar in Xinjiang’s Uighur Autonomous Region with

the deep water Chinese-built Gwadar Port at the mouth of Straits of

Hormuz, becomes operational, it can link with the Iranian pipeline after

the sanctions on Iran are lifted. India would be given the option to

come on board as well.25 However, there have been some reports that

Pakistan was delaying the project under pressure from China as Beijing

was of the view that its CPEC project was sufficient to meet Pakistan’s

gas requirements. Similarly, Iran too is reported to have said that it

may cancel the project due to construction delays by Pakistan.26

Nevertheless, some of the projects that Iran is planning for the

export of gas include the Iran-Iraq Pipeline, which is expected to

commence supply soon. Initial exports are expected to be about 50 bcf

per year (1.4 bcm per year ) and are expected to increase in the future;

the Iran-Oman Pipeline, for which an agreement was signed in March

2014, although construction may be delayed due to pricing agreements;

the Iran-Pakistan Pipeline, for which construction on the Iranian side

24. Utpal Bhaskar, “India in talks with Russia, Iran on transnational pipelines”,Livemint, June 5, 2015 at http://www.livemint.com/Industry/lTBSa05Fk3Wlyrj9c6pthP/India-in-talks-with-Russia-Iran-on-transnational-pipelines.html

25. Sajjad Ashraf, “China link-up an opportunity and a challenge for Pakistan” EastAsia Forum, June 2, 2015 at http://www.eastasiaforum.org/2015/06/02/china-link-up-an-opportunity-and-a-challenge-for-pakistan/

26. Damir Kaletovic, “Iran May Cancel $7B Pipeline Project With Pakistan”, OilPrice.com, January 27, 2017 at http://oilprice.com/Latest-Energy-News/World-News/Iran-May-Cancel-7B-Pipeline-Project-With-Pakistan.html


ap

4.2


is almost complete, although construction on the Pakistani side has

been delayed, and the Iran-UAE Gas Contract, which however is facing

hurdles over pricing and volumes. Currently, the contract has been

referred to international arbitration.27 (see Map 4.2) Therefore, despite

the fact that Iran has the world’s largest natural gas reserves, it is

unlikely that it will be in a position to rival current leaders like Qatar,

and future ones like Australia, as a major exporter.

The Challenges

Iran sees gas as the main fuel for the next 20-30 years for a world that

is scrambling to replace coal and oil to meet carbon emission goals,

and sees gas as the bridge fuel that will take their place. But there are

several challenges that will have to be met before Iran can take its place

among the leading gas market leaders.

First, it will need $100 billion to rebuild its gas industry. More

importantly, it will need the technology to not only get the long-

neglected fields to ramp up production above the current 173 bcm, but

also to construct LNG liquefaction plants. Currently, Iran has only a

half-built LNG export plant. Moreover, Iran lacks the pipeline network

required for exports.

In the fourth 5-Year National Develop Plan (2005-2009), the country

had plans to produce 70 million tonnes of LNG from the South Pars,

North Pars, Ferdosi and Golshan gas fields by launching six LNG

production facilities. However, all of these projects were cancelled after

the withdrawal of several international oil companies, including France’s

Total, Spain’s Repsol, the UK and Holland’s Royal Dutch Shell,

Malaysia’s Petronas and Petrofield LNG Co., China’s SINOC group

and CEPA as well as Poland’s PGNiG. However, with the departure of

the Western firms, the inability of Iranian and Chinese contractors, who

had agreed to provide the requisite technology, were unable to complete

the projects and, as a result, Iran’s LNG projects were delayed.28 Now,

with Total reportedly in talks to buy a large stake in Iran’s partly-built

LNG export facility in South Pars, Tehran is hopeful that the ability to

produce and export LNG will be possible in the near future.

27. See Note 6 (EIA).28. See Note 10 (Washington Institute).


No doubt there is strong support for the entry of Iranian gas into

the market, particularly from Europe, which sees Iran as a viable

alternative to Russian supplies. As the EU’s energy commissioner,

Miguel Arias Cañete, said, if all concerns over Iran’s nuclear

programme are fully addressed, there could be growing cooperation

between the EU and Iran, including on energy matters, which would

allow investments in Iran by EU firms, which in turn, would open up

additional sources of energy supply. Nevertheless, it is unlikely that

Iranian gas will be flowing to Europe anytime soon.29

A lifting of sanctions on the Iranian oil and gas industry would

also have a number of geopolitical ramifications. Despite Russia’s

apparent support for Iran, many issues of strategic competition

between Tehran and Moscow may resurface, including in the sphere

of gas markets, with Moscow taking steps to block Tehran’s entry into

European markets, as it had done in 2007, when Tehran inaugurated

gas supplies to Armenia, prompting Gazprom to build the pipeline

project within Armenia with a small circumference to pre-empt its

future use for transiting gas to European markets.

Moscow and Tehran could also find themselves competing for gas

market share in Turkey, which is currently Russia’s second largest gas

export market, and a critical factor in Russia’s gas export strategy

following the proposed route change of the South Stream export

pipeline from Bulgaria to Turkey. Another potential conflict that may

emerge is with Qatar over the delimitation of their shared South Pars/

North Field (see map below), given its status as the main source of

Qatar’s massive LNG and condensates – which are a low-density

mixture of oil or gas that are present in gaseous form but condenses

into liquid when pumped to the surface – exports, and an area which

Iran has targeted for development.30

29. Rakteem Katakey, Anna Shiryaevskaya and Isis Almeida, “Iran Seeks $100Billion for Gas as World Fixates on Nation’s Oil”, Bloomberg, June 12, 2015 athttp://www.bloomberg.com/news/articles/2015-06-12/iran-seeks-100-billion-for-gas-as-world-fixates-on-nation-s-oil

30. Brenda Shaffer, “A Nuclear Deal with Iran: The Impact on Oil and Natural GasTrends”, Policywatch 2362, the Washington Institute, January 27, 2015 at http://www.washingtoninstitute.org/policy-analysis/view/a-nuclear-deal-with-iran-the-impact-on-oil-and-natural-gas-trends


However, the biggest obstacle to Iranian exports comes from within

the country. Some members of the Parliamentary Energy Committee,

mainly belonging to the conservative camp, have opposed gas exports

on the grounds that they do not serve the long-term interests of the

country. According to them, gas resources should be reserved for

domestic use, given that Iran’s demand for gas was growing along with

its population, and for re-injection into oilfields to ramp up falling

production and to prevent further decline. According to Iranian gas

industry estimates, some 70-110 cubic metres of gas has to be re-injected

into an oilfield to get an additional barrel of oil. If a comparison is made

regarding the profitability of exporting gas or using it to increase oil

production for export, the latter will be more profitable than the former.

On the other hand, gas exports, particularly through pipelines, would

have more strategic value.31

According to Azizollah Ramazani, international affairs director at

National Iranian Gas Company, once the sanctions are lifted or eased,

Iran plans to increase gas exports seven-fold to 200 mcmd in four years

and to 1.2 bcmd in five years, from the current 800 mcmd now.32

However, exporting gas will be challenging. Two main obstacles could,

however, hamper Iran’s entry into the international gas market: Iran’s

ability to produce more gas for export and two, the need to build

infrastructure to transport it. For the former, although Iran holds nearly

17 percent of the world’s natural gas reserves,33 and owns South Pars,

which is the largest natural gas field in the world, holding almost 40

percent of Iran’s total proved natural gas reserves and accounting for

about 40 percent of Iran’s GDP in 2013, it is a net gas importer and

accounts for less than 1 percent of the global natural gas trade. It

imports gas from Turkmenistan and Azerbaijan, and exports only a

small amount to Turkey, Iraq, Armenia and Azerbaijan, the latter

through a swap deal, through pipelines.34 Moreover, the country

31. Hassanzadeh, see note 7, p. 138.32. Rakteem Katakey, Anna Shiryaevskaya and Isis Almeida, “Iran Seeks $100

Billion for Gas as World Fixates on Nation’s Oil”, Bloomberg, June 12, 2015 athttp://www.bloomberg.com/news/articles/2015-06-12/iran-seeks-100-billion-for-gas-as-world-fixates-on-nation-s-oil

33. Ibid.34. Iran, International energy data and analysis, Energy Information

Administration, US Department of Energy, June 19, 2015 at http://www.eia.gov/beta/international/analysis.cfm?iso=IRN


consumes a larger proportion of natural gas than any other country in

the world, partly due to low domestic gas prices.

Moreover, even if Iran did succeed in attracting and obtaining the

technology for liquefaction, it would be difficult to attract the

investments, given that with new LNG projects coming up, the market

is currently over-supplied, and Asian importers, the largest buyers of

LNG, are becoming increasingly sensitive to high prices.

In order to attract the huge investments required to ramp up

production to levels that would once again establish Iran as a major

energy player, the country’s investment regime has to be drastically

revamped. In fact, a major factor that contributed to the departure of

international oil majors from Iran was the country’s unattractive

investment climate. Based on memories of exploitation and dominance

of the petroleum sector by foreign entities, the post-revolutionary

government had adopted severe restrictions on foreign companies and

investments. Moreover, the buy-back contracts that were first

introduced in 1993 and extended in subsequent deals, not only

prohibited foreign companies from acquiring equity, but any costs

incurred by a foreign company which went beyond the stipulated

ceiling would not be reimbursed. As a result, most international oil

companies, who were earlier ready to risk sanctions, backed out and

left the country.35

However, realising the need to attract the vast sums of investment

and technology required to rehabilitate the oil and gas sector, the

current Rouhani government has now announced that the terms that

will be offered to investors will not only be different from the earlier

regime, but would be far more attractive than other countries. In

February 2014, a new generation of upstream investment contracts,

called the Iran Petroleum Contract (IPC) were unveiled, which made

claims to have done away with most, if not all, of the earlier buy-back

contracts’ shortcomings. In essence, the new terms include the

integration of all three stages of exploration, development and

production under a single contract, increasing the duration of the

contract to 25 years as against the earlier 5-7 years and 8-12 years

35. Elham Hassanzadeh, see note 8, pp. 85-92.


offered, a more flexible rate of return for oil companies depending on

the risk and complexity of the project, offer of alternative fields in the

event of failure to make commercial discoveries, and most importantly,

the opportunity to book reserves in some high risk projects. The latter

is a major reversal of Iran’s constitutional rule prohibiting ownership

of energy reserves by foreign companies.36

In fact, according to some analysts, the new contracts are more

competitive than other oil producers as they provide higher potential

profits and lower investment risks as well as favourable rates of return

and long-term joint venture options with local Iranian firms. Hence,

although the investors will have no rights over the reserves, after

exploration is completed, they can report output they receive as

payment.37

The new IPC has succeeded in generating renewed interest from

international oil companies in the country’s energy sector. In early June,

representatives from some of the top oil majors, including Eni, Shell,

Total and Lukoil, met with Iran’s Oil Minister, Bijan Zanganeh in

Vienna during an OPEC seminar and evinced their interest in returning

to Iran, provided the sanctions were lifted.38

President Rouhani has also taken steps to reduce the influence and

control of the Iranian Revolutionary Guards Corps (IRGC) which had

taken over a number of firms during the second term of President

Ahmedinejad (2009-2013), and was a major deterrent for potential

investors. The IRGC, despite having little experience or expertise in

the oil industry, was given the charge of maintaining the country’s oil

and gas production, as well as the development projects that

international firms had abandoned because of the sanctions. The IRGC

replaced several hundred managers of the Iranian oil companies,

including the NIOC and affiliated companies, in the gas and

petrochemical industry. However, corruption and poor management

and technical skills of the IRGC, together with financing difficulties,

36. “Iran goes the extra mile with new Oil Contracts”, Middle East Economic Survey(MEES), Vol. 58, No. 25, June 19, 2015, pp.2-3.

37. Parisa Hafezi and Jonathan Saul, “Iran sweetens oil contracts to countersanctions and price plunge”, Reuters, Feb 3, 2015 at http://uk.reuters.com/article/2015/02/03/uk-iran-oil-sanctions-exclusive-idUKKBN0L70G620150203

38. “Iran goes the Extra Mile with new Oil Contracts, no. 36.


led to a decline in the overall state of the sector, including in the South

Pars, leading to a drastic fall in production.39

After Hassan Rouhani took over the presidency, with the support

of the Supreme Leader Ali Khamanei, he reinstated Bijan Namdar

Zangeneh, who had served as oil minister during the Khatami

presidency, brought back the dismissed management personnel, and

had the Supreme Leader issue a directive to have them step aside or

reduce their involvement in the oil and gas sector.40 Despite the support

of the Supreme Leader, and the IRGC’s accession to the directive to

step aside, the fact that the energy sector is closely linked to the

economic interests of the IRGC make it unlikely that the IRGC will

willingly give up its control. Moreover, there is severe opposition from

several conservative factions in the political set-upto the reforms that

are being implemented, given that the oil and gas sector is perceived

as a symbol of national pride and sovereignty.41

Finally, there is no guarantee that the sanctions will be lifted in

the near future. Although the sanctions were lifted in January 2016 after

Iran dismantled significant elements of its nuclear programme, Iran is

not completely out of the woods. After Iran tested a ballistic missile at

the end of January 2017, the current US administration under Donald

Trump, enacted new sanctions on Iran a week later. Some 25

individuals and companies connected to Iran’s ballistic missile

programme and those providing support to Iran’s Islamic

Revolutionary Guard Corps linked to the programme were slapped

with bans on banking transfers. However, the new sanctions strike at

specific companies and arms traders from Iran to Lebanon and China,

and despite Mr Trump’s declaration that he was considering scrapping

the JCPOA or the nuclear deal itself, it continues to stand, although

the US has hinted that it may impose more sanctions.

39. Ariane Tabatabai, “Where does the Islamic Revolutionary Guard Corps standon nuclear negotiations?” Bulletin of the Atomic Scientists, March 11, 2015 at http://thebulletin.org/where-does-islamic-revolutionary-guard-corps-stand-nuclear-negotiations8084

40. Nader Habibi, “Can Rouhani Revitalize Iran’s Oil and Gas Industry?”, MiddleEast Brief, No. 80, Crown Center for Middle East Studies, Brandeis University,June 2014 at http://www.brandeis.edu/crown/publications/meb/MEB80.pdf

41. Ibid.


Therefore, as of now, Iran is gearing up to increasing its natural

gas (and oil) production to pre-sanctions levels, with several European

oil and gas companies showing interest in doing business with the

Islamic Republic. But the prospect of millions of barrels of Iranian gas

entering the market at a time when the market is over-supplied could

stave off a price recovery for a longer time. Hence, Iran would, in all

likelihood, be able to develop significant export capacity only in the

long term, that is, beyond 2020, while LNG exports could take even

longer.42

However, Iran’s limited gas exports are not the problem. In fact,

from a macro-economic point of view, it may be more valuable for Iran

to export gas and energy in other forms, such as electricity or products

of gas-based industries such as petrochemicals, steel, cement and

aluminium. The main problem is with Iran’s domestic pricing regime

and low energy efficiency. Although Iran has attempted some price

correction through subsidy reforms with some success, residential and

also industrial consumption remains high. Therefore, in order to

achieve its potential, the government will have to draft a

comprehensive strategy for the gas sector and related industries. An

appropriate gas pricing strategy will be one of the success factors.

Furthermore, Tehran has to attract the latest technologies to all sub-

sectors of the gas value chain (from upstream to midstream and

downstream), gas-based industries and most importantly, energy

efficiency.

If all of the above are addressed, Iran will be on its way to becoming

a significant hub for energy production and energy-related exports on

an international scale, provided it succeeds in overcoming the

challenges of meeting domestic requirements and an over-supplied

market.

42. Elham Hassanzadeh, Note 7, pp.140-150.

5QATAR – LNG LEADER, BUT FOR

HOW LONG?

What Saudi Arabia is to the oil market, Qatar is to the gas, specifically

the LNG, market. Nonetheless, being one of the smallest states in the

Persian Gulf, with a population that is outnumbered by a foreign

workforce, and sandwiched between powerful neighbours – Saudi

Arabia and Iran – Qatar has successfully transformed itself from a

traditional tribal society and a British protectorate till the early 1970s,

into an economic powerhouse. Under the ruling al-Thani family, and

more specifically Sheikh Hamad bin Khalifaal Thani, the son of Emir

Khalifaal Thani, from whom he took over in a bloodless coup in 1995,

the tiny kingdom has managed to position itself as a major political

player in a region by playing a mediatory role successfully among

varying factions, backed by immense wealth. It has one of the highest

per capita incomes exceeding $ 105,829 and an enviable GDP growth

rate, which however, has shown a decline over the last three years from

a high of 26.2 percent in 2006 to 3.6 percent in 2016. Over the last decade

and a half, Qatar has acquired valuable and prestigious assets around

the world, including strategic shares in major companies, which has

allowed it to gain the potential to influence economic and political

decisions in the countries in which they are made.

On the political front, it has increasingly being acquiring the

reputation of an international player. Apart from being a member of

important organisations, including OPEC, the Gulf Cooperation

Qatar – LNG Leader, But for How Long? 89

Council (GCC) and the Arab League, it has befriended the US by

allowing it to use its air bases to supply American forces in Iraq and

Afghanistan, although it has several differences with Washington. At

the same time, it also facilitated non-state organisations like the Taliban

to open a political office in its territory; it supported the forces involved

in ousting Libyan strongman Muammar Gaddafi; it backed the Muslim

Brotherhood in Egypt and the Islamist rebels in Syria and it mediated

disputes among Palestinian factions as well as factions in Lebanon and

Sudan. It owns the al Jazeera TV channel – the most important media

outlet in the region – it hosts satellite campuses of American

universities. Moreover, the Emirate has been acquiring strategic shares

in major companies throughout the world, which gives it the potential

to exercise some influence in policy making. As a result, Qatar is

perceived as an important and influential player in the region.

Qatar’s ability to punch far above its weight would not have been

possible without its huge hydrocarbon reserves – particularly natural

gas – which accounts for 15 percent of global reserves.1 Since the

discovery of the massive North Field, which is the largest non-

associated gas field in the world, which held 40 trillion cubic metres,

in 1971 – the year it gained independence, Qatar has positioned itself

as the world’s largest liquefied natural gas (LNG) exporter and more

importantly, a critical “swing supplier” of gas. Although its LNG

exports commenced only in December 1996, they have grown six-fold

in the last 10 years.2 Given that the North Field’s reserves contain non-

associated gas reserves, that is, the gas is not linked to that of oil, it is

not fettered by Organisation of Petroleum Exporting Countries (OPEC)

quotas, and more importantly, free from the possibility of Saudi

domination.

However, recent events in the international gas market could force

Qatar to surrender, or at the very least, downgrade its position as the

undisputed leader of the LNG market. With new gas – including LNG–

1. Jim Krane and Steven Wright, “Qatar ‘rises above’ its region: Geopolitics andthe rejection of the GCC gas market”, Kuwait Programme on Development,Governance and Globalisation in the Gulf States, No. 35, London School ofEconomics and Political Science, March 2014, p.9.

2. Bassam Fattouh, Howard V. Rogers, and Peter Stewart, “The US Shale GasRevolution and its Impact on Qatar’s position in Gas Markets”, Center on GlobalEnergy Policy, Columbia University, March 2015.


producers and exporters entering the market, coupled with the

prevailing low gas prices which may extend for a while leading to a

fall in Qatar’s revenues, Qatar has been fighting to retain its position.

Most importantly, with the availability of more supplies of LNG poised

to enter the Asian markets as new LNG production comes on line from

Australia and the US, the emergence of a strong spot market is

inevitable, which, in turn, will not only allow consumers to bargain

harder for lower prices in future deals, but could also precipitate the

formation of a regional pricing regime, as against the current system

based on oil indexation. More importantly, Qatar may lose its status

as the sole “swing producer” of gas, thereby removing Doha’s strategic

importance at the international level.3

Qatar’s Energy Policy

In the early decades of oil production, natural gas was considered a

near-worthless by-product and provided to domestic markets at low

prices. Over time, however, natural gas came to be valued as a key

domestic resource that could be deployed to substitute for more

valuable oil in the domestic economy, assisting states in maintaining

oil exports in the medium and longer term. Gas demand has risen

within the power generation and industrial sectors, as well as in

enhanced oil recovery applications, where it is re-injected into

depleting oil reservoirs. The Gulf States have recently exhibited a new

willingness to invest in gas-specific exploration and production and

to pay much higher prices for gas imports. These states have also begun

to invest in expensive marginal increases in domestic gas production.

Price distortions are thus a key factor behind shortages in the Gulf.

Low prices drive demand as well as the inability to meet demand,

through development of large but under-utilised reserves in most of

the ‘gas-short’ monarchies. The GCC-5 states (i.e. not including Qatar)

consume nearly all the gas they produce.

Natural gas reserves in Qatar were first discovered in 1971 in the

huge North Field, although it took 20 years before its potential could

be exploited, both because of its location at a distance from major gas

3. Naser al-Tamimi, “Navigating Uncertainty: Qatar’s Response to the Global GasBoom”, Brookings, Doha Center, March 2015.


markets as well as investment challenges. As a result, production began

only in the early 1990s. Qatar soon realised that apart from fulfilling

domestic demand, it would be necessary to find export markets,

particularly outside the region, if it had to monetise its resources due

to low regional prices and unsuccessful plans to expand pipeline

networks apart from the Dolphin project. However, it took a decade

of perseverance to overcome constraints and tie-ups with international

oil companies before Qatar’s first shipment of LNG to Japan was

contracted. Since then, Qatar has not looked back and over the next 15

years, it built a LNG chain and a reputation of a reliable supplier that

has, so far, kept competition at bay. Today, Qatar is the largest exporter

of LNG and gas-to-liquids (GTLs) in the world, with a supply chain

that spans the globe.4 Due to its strategic location which is roughly

equidistant between the major energy-consuming centres of Asia and

Europe, Qatar’s strategy is to establish itself as a swing producer –

which is quite different from Saudi Arabia’s status as the swing

producer of oil – in that, it can supply gas to markets in both the

Atlantic and the Pacific Basins, and perform the role of arbitrageur

between these regions. In other words, by taking advantage of a price

difference between Asian and European markets, Qatar is able to sell

LNG into Europe when prices in Asia are low, and direct LNG to Asia

when prices in Asia are high.5

Although Qatar’s reliance on gas exports, the decoupling of gas

and oil prices in the aftermath of the Japanese earthquake of 2011,

suggest that it is likely to be one of the best placed GCC nations to

weather the current fall in oil prices. That said, Qatar is not immune

from the changes that are taking place in the international gas market.

According to medium-term projections for global gas supply,

downward pressure on prices is very likely, given the entry of supplies

from Australia, the US and African countries. Yet, Doha has not

announced any increase in production from existing fields in its own

territory, and in fact imposed a moratorium on increasing output from

4. Ibrahim Ibrahim and Frank Harrigan, “Qatar’s Economy: Past Present andFuture”, QScience Connect, September 17,2012 at http://www.gsdp.gov.qa/portal/page/portal/gsdp_en/knowledge_center/Tab2/Qatar%20economy%20past%20present%20and%20future.pdf

5. Bassam Fattouh, Howard V. Rogers, and Peter Stewart, no. 2.


its North Field – which it shares with Iran’s South Pars – till 2015,

ostensibly to monitor the health of the reservoir to assess its longevity,

but more likely to gauge market demand. Hence, apart from its $10.3

billion Barzan gas project, which is mainly dedicated for serving

growing domestic demand, no further gas projects have been

sanctioned. Instead, it plans to increase its LNG production by

improving the efficiency of its LNG production plants and may also

expand its production capacity of gas-to-liquids (GTL) and LNG fuel

for the shipping industry.6 (Map 5.1)

Moreover, in order to retain its dominant position as LNG supplier,

it is pursuing a strategy of “buying up the competition”, somewhat

akin to Russia’s policy, by forming joint ventures with international

oil companies, including ExxonMobil, where its investment in the

Golden Pass LNG terminal in Texas is expected to reach over $10 billion

with over 20 bcm in annual export capacity. Clearly, despite the current

dismal projections on the LNG front, Qatar is intent on remaining a

long-term player.

However, with the advent of new LNG players entering the market

and more importantly, with US exports offering hub-based pricing,

Qatar has initiated reforms in order to retain its leadership role in the

LNG market. Moreover, following the (partial) lifting of the sanctions,

Iran has the potential to become a major rival for Qatar, both within

the region as well as in the larger global market, provided it can

overcome domestic opposition to gas exports and acquire liquefaction

technology.

Regional Policy

Despite the presence of substantial gas reserves in the region, barring

Qatar, the Arab states in the Persian Gulf, suffer from domestic

shortages in gas demand. Ironically, although the demand for gas is

growing in the region, the regional gas market is not a priority for

Qatar, which exports 20 billion cubic metres a year (bcm/y) through

the Dolphin Pipeline, which transports gas from Qatar’s North Field

to the UAE and to Oman, which is far less than the pipeline’s capacity

of 33 bcm/y. This is partly because the GCC states were unwilling to

6. Naseral Tamimi (see note 3).

Qatar – LNG Leader, But for How Long? 93M

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5.1


pay what Qatar considered a reasonable price for its gas, and partly

because of disputes between Qatar and its neighbours. Qatar’s gas

marketers, RasGas and Qatar Gas, demand that regional buyers pay

prices that are equivalent to the netback value of global LNG exports,

that is, all importers should pay the same price, whether it is exported

to Japan or to neighbouring countries.7 As a result, Qatar decided to

go for constructing liquefaction plants in the late 1990s, albeit

reluctantly, as the investments required for LNG plants were double

that of pipelines, and sought instead to export its gas to customers far

beyond the region. As gas prices were contractually linked to oil prices

– which started to increase from 2002 – Qatar earned far higher

revenues from LNG sales than those from fixed prices in the GCC. It

also sold surplus production on the spot market. By so doing, Doha

has attained not only the status of the world’s largest LNG exporter,

but has also succeeded in forming linkages with powerful importing

states, who have become stakeholders in the security of continued

Qatari supply. This strategy has facilitated it to expand its global

influence, which not only allows it to punch far above its weight but

also improve its national security.8

However, the only significant cross-border gas pipeline in the region

is the Dolphin Pipeline, which began carrying gas from Qatar to the

UAE in 2007. From 2008, an extension began delivering Qatari gas to

Oman. But plans to expand the network to Kuwait and Bahrain were

blocked by Saudi Arabia, as it was unwilling to allow new pipelines to

be constructed across its maritime borders. As a result, 62 percent of

Qatar’s LNG exports are directed to Japan, South Korea, India and China.9

But with the demand for gas in the region is expected to grow due to

a combination of fast-growing population, and rising concerns over

climate change, Qatar may look at increasing its market share within

the region as well. In October 2016, Qatar Petroleum signed a long-term

sales agreement with Dolphin Energy, whereby QP will deliver more

gas to Dolphin for export to the UAE through the existing subsea

7. Krane and Wright, see note 1, p.5.8. Ibid., pp.2-3.9. Ibid.


pipeline.10 It has also brokered a four-year deal earlier this year to supply

Kuwait with 0.7 bcm/y from March.11 (see Map 5.2)

Energy as Strategic Tool for Foreign Policy

Following the 1990 invasion of Kuwait by Saddam Hussein’s Iraqi

forces, Qatar realised its vulnerability vis-à-vis its powerful neighbours.

Therefore, it decided to hedge its bets by building strong ties with the

US on one hand – it gave the US Air Force conditional use of its al-

Udeid Air Base, availing of its military protection – and on the other,

ensured that it maintained relations with non-state actors such as

Hamas as well as “pariah” states like Iran, the aim being to expand its

traditional role as a mediator between rival tribes in the region in the

international arena.12

But without its natural resources, mainly natural gas as well as

substantial reserves of crude oil, this would not have been possible.

Qatar has the world’s third largest gas reserves of 871.5 trillion cubic

feet (24.7 trillion cubic metres), representing about 13.3 percent of global

proven oil reserves. The country also produced 158.5 billion cubic

metres (bcm) or 4.7 percent of global gas production, making Qatar

the world’s fourth largest gas producer in 2013 after Russia, the US

and Iran, according to the BP Statistical Review 2014.13 More than 84

percent of Qatar’s gas exports are in the form of liquefied natural gas

(LNG), more than two-thirds of which (71.4 percent) is shipped to Asia.

Furthermore, Qatar has managed to contain domestic price pressures

by setting over $300 billion of export revenues aside in its growing

sovereign wealth funds and managing a proactive interest rate policy.

10. Shardul Sharma, “Qatar Petroleum, Dolphin sign new gas contract”, NaturalGas World, October 6, 2016 at http://www.naturalgasworld.com/qatar-petroleum-dolphin-sign-new-gas-contract-32017

11. “Qatar taking ‘aggressive’ stance in Europe to mitigate LNG risks”, HellenicShipping News, December 10, 2016 at http://www.hellenicshippingnews.com/qatar-taking-aggressive-stance-in-europe-to-mitigate-lng-risks/

12. Robert Siegel, “How Tiny Qatar ‘Punches Above Its Weight”, WBUR News,December 23,2013at http://www.wbur.org/npr/255748469/how-tiny-qatar-punches-above-its-weight

13. BP Statistical Review of World Energy, 64th edition, June 2015 at http://www.bp.com/content/dam/bp/pdf/Energy-economics/statistical-review-2015/bp-statistical-review-of-world-energy-2015-full-report.pdf


ap

5.2


This strong gas revenue-base allowed Qatar to improve its regional

autonomy, particularly with respect to Saudi Arabia. It also allowed it

to diversify its security requirements beyond reliance on the US. Doha

leveraged its energy linkages to build strategic relationships with

several countries, and lessening its dependence on Saudi Arabia. As

importing states grew more dependent on Qatari supply, they became

stakeholders in Qatar ’s political stability and external security.

Although Qatar continues to depend on the US’ hard security umbrella,

without which its energy lifeline would be vulnerable, Qatari policy

of signing long-term contracts have allowed it to become less reliant

on the US’ diplomatic support. In other words, Qatar’s foreign policy

can be interpreted as maximising independence of action by leveraging

its sovereign wealth investment strategy, through which it reaps further

political influence, thereby augmenting national security. With the

wealth that Qatar accumulated from its energy exports, enabled it to

buy up prime real estate in the UK and Paris and invest in companies

such as Barclays, LVMH and Xstrata. Economic power also allowed it

to gain political influence.14

Impact of a Changing Gas Market

Although Qatar’s main strength lies in its gas sector, it has traditionally

earned most of its revenue from oil. Since the country’s natural gas

meets most of its energy demand, it exports most of its crude oil and

petroleum products.15 Hence, the changes that have taken place in the

gas market with the advent of new supplies may have serious

implications, not only for Qatar’s economy but also for its role as a

geopolitical actor.

Already, increasing supplies have wiped out premium for spot

supplies in the East Asian markets, while the substantial fall in prices

has seen several LNG export projects being delayed or cancelled. In

fact, LNG prices began falling even before the crash in oil prices due

14. Anita Hawser, “Qatar Faces Geopolitical Risk”, Global Finance, December 06,2012 at http://www.gfmag.com/magazine/december-2012/report-qatar-faces-geopolitical-risk-

15. Qatar, Country Analysis Briefs, Energy Information Administration (EIA), USdepartment of Energy, January 30, 2014 at http://www.eia.gov/beta/international/analysis_includes/countries_long/Qatar/qatar.pdf


to an increase in supply coupled with slow demand growth. Moreover,

with the impending return of Iran to the energy – including gas –

market following the signing of the nuclear agreement between Tehran

and the P5+1 countries and eventual lifting of sanctions, possibly by

December, Qatar may be facing even bigger competition in the longer

term.

According to market projections, Australian supplies from 2015

onwards are expected to pose a serious challenge to Qatar’s dominance,

as it seems poised to overtake Qatar in 2018 as the top LNG exporter,

while the US is expected to take the top spot by 2020. Some projections

even indicate that Qatar may have to be content with sliding to the

fourth position after Australia, Africa and the United States.

That Qatar needs to remain on top of the LNG suppliers’ chart is

imperative for the kingdom as the strategic importance it derives as

the world’s number one LNG exporter may also diminish concurrently.

Given that more than 90 percent of Qatar’s budget revenues and

exports stem from activities associated with the energy sector, the fall

in oil and gas prices are showing signs of impacting the country’s

economy, despite its large accrual of revenues earned from LNG sales.

Continued lower oil prices could lead to a substantial deterioration of

the fiscal and external balances, according to an IMF report, with the

country’s budget sliding into deficit and the current account surplus

being largely eliminated.16 In the case of gas, lowering of oil prices has

also impacted on Qatar’s revenue earnings, since Qatar prices its long-

term LNG contracts on the Japanese Customs-cleared Crude or Japan

Crude Cocktail (JCC) price index, which is usually between 14-15

percent of the JCC price.17

Most importantly, the leverage that Qatar enjoys as the main

supplier for Asian LNG buyers may also be affected as new supplies

enter the market. According to some reports, Qatar’s LNG exports to

Japan, South Korea dropped by 3.6 percent in 2016, while Australia

increased its share in these countries by 8.4 percent. On the other hand,

however, its exports to China and Taiwan have increased, albeit

16. Nicolas Parasie, “Qatar Risks Budget Deficit in 2016 Due to Low Oil Prices, IMFSays”, The Wall Street Journal, April 2, 2015, http://www.wsj.com/articles/qatar-risks-budget-deficit-in-2016-due-to-low-oil-prices-imf-says-1427983369

17. Naseral-Tamimi, no. 3, p. 27.


modestly. Moreover, it has been seeking to increase its market share

in Europe, and to some extent it has been successful by offering more

flexible terms. Along with consortium partners in its QatarGas 3 joint

venture, comprising Qatar Petroleum, ConocoPhillips and Mitsui, it

will be exporting 1.5 bcm/y to Northwest Europe over the next seven-

and-a-half years.18

However, some of Qatar’s customers have been demanding that

Qatar reduce its prices. Recently, India, which has a 7.5 million tonnes19

a year contract with Ras Gas for LNG on a long-term 25-year contract,

priced at around $12 per million British thermal units (mmBtu), has

now succeeded in getting Qatar to bring the price down to $5/mmBtu.

Citing the drastic fall in prices and using its growing leverage as a

market, India had stated that if the prices were not cut, it would seek

a 38 percent cut in import volumes for 2015. While Qatar agreed to the

price cut, and also agreed not to seek damages for under-lifting

supplies, it however, managed to get India (Petronet LNG) to sign for

an additional import of 1 million tonnes per year for about 12 years

with effect from January 1, 2016 at the prevailing market price.20

According to reports, other LNG exporters too have been cutting

prices. QatarGas amended its long-term deal with PetroChina, signed

in 2011 for 3 million tonnes per year, by allowing more deliveries

during the peak winter period, as against the earlier system of

delivering the same amount of LNG every month. In any case, Qatari

volumes to China have come down by 77 percent year-on-year to just

92,000 m.t., levels that have not been seen since 2011.21 Japan too has

cut its imports.

Therefore, as Qatar’s main buyers reduce their offtake, turning

increasingly to the spot market, Qatar has three options. It can increase

18. “Qatar taking ‘aggressive’ stance in Europe to mitigate LNG risks” HellenicShipping News, December 10, 2016 at http://www.hellenicshippingnews.com/qatar-taking-aggressive-stance-in-europe-to-mitigate-lng-risks/

19. 1 million metric tonnes of LNG is equal to 1.38 billion cubic metres.20. India renegotiates LNG agreement with Qatar: Indian minister”, The Peninsula,

May 4, 2016 at http://www.thepeninsulaqatar.com/business/qatar-business/380794/india-renegotiates-lng-agreement-with-qatar-indian-minister

21. Chinese April LNG imports reach 1.5 mil mt, significant cuts to Qatar volumes,Platts, May 26, 2015 at http://www.platts.com/latest-news/natural-gas/singapore/chinese-april-lng-imports-reach-15-mil-mt-significant-27449745


its spot sales or go for shorter term deals as against long-term contracts,

reduce its price as per clients’ demands, or adopt a flexible pricing

regime.

With regard to the first, Qatar is already one of the top spot and

short-term exporters, accounting for 38 percent of spot and short-term

deals. But the fact that it is ready to show more flexibility is clear from

its recent deal with Pakistan. In February 2016, QatarGas signed a deal

with Pakistan for 3.5 m.t. per year, where under a take-or-pay deal, it

has agreed to review the price 10 years after supplies commence,

thereby giving Pakistan added flexibility in the contracts.22

In a bid to cut costs which will also allow it to lower prices even

further, Qatar’s number one and two LNG producers, Qatargas and

RasGas, respectively, have announced recently that they will now

operate under a single entity, named Qatargas. The integration process

is planned to start immediately and is expected to be completed within

the next 12 months. The two companies will merge their resources and

capabilities to enhance their competitive position. The move is expected

to save hundreds of millions of dollars.23

In fact, one of the factors that have allowed Qatar to adopt flexibility

is the advantage it has in production costs. For example, RasGas can

produce one mmBtu of gas at $1.60 – lower than US prices – which

gives it a competitive edge vis-à-vis rival producers like Australian

producers, whose production costs are around $13.50/mmBtu.

Moreover, Qatar owns and operates a fleet of 60 LNG vessels, which

provides it a huge supply chain coverage than many of its rivals, giving

it a distinct competitive advantage.24

Nevertheless, Qatar is also diversifying its traditional market from

Asia to Europe. In 2015, it sold an extra 3 million tonnes to European

customers from a year earlier, offsetting the lower volumes to Asia.25

However, given that the European market is saturated, and will have

to deal with traditional and new suppliers like Russia and the US, both

22. Ibid.23. “QatarGas and RasGas to merge”, LNG World News, December 12, 2016 at http:/

/www.lngworldnews.com/qatargas-and-rasgas-to-merge/24. See note 21, Platts, 2015.25. Ibid.


of who are ready to offer competitive rates, Qatar will not be able to

bank on Europe to balance the loss of any Asian market.

Qatar’s Options

In the face of emerging challenges, Qatar nevertheless has a few cards

to play. Unlike its newer challengers in the LNG market, Qatar’s cost

of production is one of the lowest in the world, which, as in the case

of Saudi Arabia in terms of oil production, leaves it in a more

favourable position to withstand low prices. Production from emerging

markets like Australia and some African producers, are much more

expensive to produce.

Second, with climate change concerns increasingly taking centres

tage, and renewable energy unlikely to deliver on the volumes required

for increasing energy demand, particularly in Asia, the future for gas

seems bright. According to the BP Energy Outlook 2035, global natural

gas demand is expected to grow by 1.9 percent per annum, reaching

around 490 billion cubic feet by 2035, driven by demand in non-OECD

countries, as well as Asia and the Gulf states.26 Given Qatar ’s

geographical location, it is ideally positioned to serve both the Asian

and West Asian markets.

Third, in order to further develop businesses in the global LNG

arena, Qatar-owned companies are investing in production facilities

outside the country. Using its huge sovereign wealth fund, the Qatar

Investment Authority, plans to invest as much as $20 billion in Asia

by 2020. Qatari energy companies are already collaborating with

ExxonMobil through a joint venture to construct a liquefaction plant

in Texas, which, pending approvals, could commence construction by

2016.

Fourth, Qatar can drive higher cost competition out of the market

by increasing production and lowering costs. This was the plan when,

despite the moratorium on North Field, it began work on the $10 billion

Barzan project, a joint venture between Qatar Petroleum and Exxon-

Mobil. The project was originally expected to come online in 2014, with

26. BP Energy Outlook 2035, February 2015 at http://www.bp.com/content/dam/bp/pdf/Energy-economics/energy-outlook-2015/Energy_Outlook_2035_booklet.pdf


plans to boost gas production by up to 2 billion cu ft per day (56633693.2

cu. metres per day) in the first half of 2017, with the bulk of the

production going towards meeting rising domestic demand, leaving

more supplies for export. However, the project has been delayed due

to a leak in the upstream pipeline, dealing a blow to plans to increase

production. Although the project was expected to commence

operations in November 2016, there has been no news on the issue.

In the long run, the key for Qatar to retain market share would be

to quickly adapt to changing market dynamics. Furthermore, it is also

revisiting its regional policy, given that demand for gas in the region

is projected to increase from 5.44 bcm in 2015 to 12.2 bcm by 2020, and

31.2 bcm by 2025.27 It is well placed to meet most, if not all of the

region’s gas demand, both by pipeline as well as LNG, although pricing

differences will have to be sorted out.

Therefore, in order to retain its premier position in the LNG market

in the face of the impending competition, Qatar is now looking to

diversify its market from its three main markets, viz., Japan, South

Korea and India, and is not averse to including smaller markets, and

more importantly, lower prices. Recently, it signed a contract to supply

Pakistan with 2.2 bcm/y at a competitive price of $7 per million Btu

and has also tied up contracts with Thailand’s PTT for a 20-year supply

from 2015 as well as Poland’s PGNiG starting 2015.

It has also signed a joint venture with ExxonMobil and

ConocoPhillips in the Golden Pass LNG export project, where it will

be offering prices based on HH indexation to customers, thereby

increasing its options to act as a swing supplier between Europe and

Asia.28 It has also signed an agreement with UK-based EDF to supply

the new import terminal in Dunkirk with another 2.7 bcm/y over and

above the current 11 bcm/y. It has also increased its market share in

Europe by 3.3 percent year-on-year since 2015.

Recently, Qatar Petroleum (QP) signed a deal with Abu Dhabi

National Oil Company to enhance supplies to the UAE via the Dolphin

pipeline. Furthermore, QP has taken advantage of its domestic joint

27. Naseral Tamimi, note 3.28. “Qatar looks to adapt amid shifting global LNG landscape”, MEES, Vol. 58,

No.9, February 27, 2015, pp.10-11


ventures to forge their first major foreign partnership with ExxonMobil,

and their interest to purchase shares in both Mozambique and Egypt’s

Zohr field.

Qatar’s ability to offer more competitively priced contracts ensures

a steady stream of revenue, Apicorp said, adding at present, more than

80 percent of its production is committed for 2016-20, as part of supply

purchase agreements, securing revenue stability.

Qatar is also expanding its non-oil and gas sector in order to reduce

its dependence on the hydrocarbon sector. Using its huge wealth

funded from decades of LNG sales, it has over the last year alone

invested across the globe in assets as diverse as poultry farms in Turkey,

Russia’s Rosneft and the UK gas company National Grid Plc. as well

as holdings in Hollywood, realty in New York and London, the Italian

luxury sector and even a soccer team.29 Furthermore, the government

has established economic zones as part of its drive to expand local

manufacturing and non-gas exports, and increase FDI into the

country.30

Future Challenges for Qatar

In the not too distant future, the gas market may shift from a sellers’

market to a buyers’ market, with the onslaught of new supplies coming

from Australia, the US, Canada, East Africa, Russia and the Levant.

Moreover, with the sanctions on Iran lifted from 2016 following the

nuclear deal, it will be only a matter of time before Iran, with its vast

reserves of gas, will be in a position to rival Qatar. Iran has already

begun focusing on increasing production from its giant South Pars

(called North Field by Qatar) gas field, which it shares with Qatar. (See

map) Since 2011 Qatar has placed a moratorium in place on further

development of the North Field, ostensibly to conserve its gas

resources. However, while South Pars is an important part of Iran’s

vast hydrocarbon reserves, the North Field, which also produces

700,000 barrels per day of condensate, is Qatar’s largest source of gas,

29. Mohammed Sergei, “The Tiny Gulf Country With a $335 Billion Global Empire”,Bloomberg, January 11, 2017 at https://www.bloomberg.com/news/articles/2017-01-11/qatar-sovereign-wealth-fund-s-335-global-empire

30. See note 28.


and Doha consequently takes a conservative view of reservoir

management. For years, Iran has been accusing Qatar of siphoning off

Iran’s portion of gas. However, with the price of gas falling, Qatar is

in a dilemma on whether to lift the moratorium. If it decides to lift the

moratorium, and boost production, it will lead to depletion of the field

earlier than the envisaged 100 years, which in turn would have a major

impact on Qatar’s plans to expand production in the long term.31 On

the other hand, if it delays lifting the moratorium, Iran will benefit. It

has already signed a heads of agreement deal with Total to develop

the Phase 11 of the South Pars gas field, the first to be signed under

the new Iranian contract model.32 For the time being therefore, Qatar

is focusing on investing in overseas blocks, including in Cyprus and

Morocco to sustain its share of the LNG market. (Map 5.3)

Secondly, Russia too is looking at setting up large-scale LNG

projects aimed at generating at least 68 bcm/y of additional liquefaction

capacity by the early 2020s, and a further doubling its LNG capacity

from the current 4.5 percent, and further to 20 percent in the long term.

If its Yamal LNG, which is already under construction and expected

to produce 22.4 bcm/y of LNG by the end of 2017, as well as four other

planned projects which are waiting in the wings, get off the ground,

Russia would be in a position to compete with Qatar’s LNG exports

in European and Asian markets. It is with this in mind that it is

studying the possibility of a tie-up with QatarGas. Russia’s second

largest gas producer Novatek has been talking with Qatar to jointly

market LNG from its newly constructed production unit in Yamal

peninsula, which it is building with France’s Total and China’s CNPC

and Silk Road Fund.33 However, given the present conflict over Ukraine

and the sanctions imposed on Russia, it may be difficult for Russian

31. “Iran, Qatar face off over North Field, South Pars”, Iran Review 2013, Oil &Gas News, Volume 32, Issue 14, April 6-12, 2015 at http://www.oilandgasnewsonline.com/Article/35647/Iran,_Qatar_face_off_over_North_Field,_South_Pars

32. Verity Radcliff, “Total eyes South Pars project FID in 3-6 months”, Interfax,November 8, 2016, http://interfaxenergy.com/gasdaily/article/22729/total-eyes-south-pars-project-fid-in-3-6-months

33. Vladimir Soldatkin and Olesya Astakhova, “Novatek eyes cooperation withQatarGas in LNG marketing - Russian energy minister”, Reuters, June 3, 2016at http://af.reuters.com/article/commoditiesNews/idAFL8N18V2DF


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companies to move forward with these projects. Moreover, with

Russia’s economy being heavily dependent on oil exports and the

decline in oil prices, the economic viability of many of these projects

are in doubt.34

Qatar also has the option to do a Saudi Arabia and take advantage

of its low-cost production to flood the market with LNG to lower prices,

which could affect the bottomline of rival producers, particularly the

high-cost producers like Australia as well as US shale gas producers

as well as Iran, who will be requiring high prices to develop its long-

neglected fields, making it difficult for them to compete. This, however,

is a risky option as although, thus far, Qatar has managed to maintain

its robust economic growth, the IMF has warned that in the medium

term, growth is expected to come down due to a tapering off of public

investment, due in part to lower revenues accruing from falling oil and

gas prices.35 At a time when the government has launched an ambitious

infrastructure investment programme in order to diversify its economy,

which would require around $210 billion through 2021, and despite

attempts at diversifying its economy away from hydrocarbons, the oil

and gas sector accounts for more than 50 percent of its GDP. Hence,

Qatar needs a price that would foot the bill, as it were. If Qatar

continues to use oil-indexed pricing, it would require, according to

some estimates, a minimum oil price of around $78 a barrel, to avoid

the possibility of running into a fiscal deficit.

Furthermore, as more buyers, particularly in Asia, are demanding

a more flexible price indexation, there is a possibility of a new Asian

gas hub emerging. Although this may not take place in the short term,

particularly if the price of oil remains low which would make it

beneficial for consumers to continue with oil-indexed pricing, the

prospect of more US shale gas being made available to Asian

consumers may pressure Qatar to offer more diversified pricing.

If any of the above changes occur, the impact on Qatar would be

profound. Apart from economic stresses, its profile as a regional power

which it has built up so carefully over the last decade, could be severely

34. Naseral Tamimi, see note 3.35. “IMF warns Qatar of Budget deficit”, Middle East Economic Survey (MEES), April

17, 2015, p. 17.


affected; worse, its worst fears – of being subservient to its giant

neighbours – may come true. Nevertheless, Qatar is in a better position

than many of its rivals, mainly because of its low production costs and

large monetary reserves which allows it the leverage to ride out this

difficult period. It also got its LNG infrastructure constructed at an

opportune time when it was flush with funds during a high-price

regime, and therefore, does not have any major investments planned

which require more capital expenditure. Moreover, with a fleet of 60

LNG vessels, almost half of which are the giant Q-Flex and Q-Max

ships, it has an enviable supply chain that can transport supplies in

any part of the world, giving it the advantage of infrastructure from

start to finish, giving it a flexibility that is hard to match. Hence, if any

gas exporter has the wherewithal to wait it out till the market balances

out again, it is Qatar.

6TURKMENISTAN – THE OLD NEWCOMER

A decade ago, few would have predicted that the former Soviet state

of Turkmenistan would one day emerge as a serious contender in the

gas market. Virtually closed to independent scrutiny, tightly restricted

and monitored media and religious freedoms, and often criticised for

human rights violations, Turkmenistan, with its huge energy reserves,

particularly natural gas, has today emerged as a leading gas supplier,

rivalling its regional, indeed global competitors as a contender for the

world’s leading gas markets. With a combination of low domestic

demand given its small population of 5.4 million people, high economic

growth at over 6 percent in 2016, Turkmenistan is well placed as an

ideal natural gas exporter – albeit on paper as of now. With proven

reserves reported at more than 17.5 trillion cubic metres (tcm) at the

end of 2014, according to the BP Statistical Review of World Energy 2015,

Turkmenistan ranks fourth in the list of gas-producing countries and

the second-largest dry natural gas producer in Eurasia, after Russia.

Moreover, recent discoveries are expected to offset the decline in mature

gas fields. Onshore reserves are particularly concentrated at Galkynysh,

in the south-east.1 However, given the paucity and unreliability of

official data, it is difficult to state with certainty whether the official

figures are accurate.

1. Annette Bohr, “Turkmenistan: Power, Politics and Petro-Authoritarianism”,Chatham House Research Paper, March 2016, p. 64 at https://www.chathamhouse.org/sites/files/chathamhouse/publications/research/2016-03-08-turkmenistan-bohr.pdf

Turkmenistan – The Old Newcomer 109

Nonetheless, there is no doubt that a number of the world’s largest

natural gas fields, including the Galkynysh field, which is one of the

world’s largest natural gas fields, primarily in the Amu Darya basin

in the southeast, the Murgab Basin in the south, and the South Caspian

basin in the west. The country also has around 600 million barrels of

proven oil reserves, and produces around 260,000 barrels per day

(b/d).2

Despite being the leading gas producer in the region, the country

has not made as large an impact on the international energy market.

Despite the dependence of Turkmenistan’s economy on gas and oil

exports, which reportedly account for 31 percent of the GDP,3 this has

witnessed a decline recently. One of the reasons for this is, as in the

case of the other Central Asian energy-rich countries, Turkmenistan is

landlocked with the only viable outlets, apart from the Russian

network and the recent pipeline infrastructure being constructed to

export gas top China, is a pipeline through the Caspian Sea which can

take Turkmen gas to the European market. But, with the dispute over

the Caspian Sea’s legal status unresolved, any offshore production

and/or transport becomes the focus of conflict among the littoral states.

For example, when Azerbaijan signed a production sharing agreement

with Western oil companies in 1998 to explore the Alov offshore field

in the Caspian, Iran objected to what it saw as Azerbaijan’s unilateral

decision, and demanded an end to such operations till the legal status

of the Caspian Sea was settled. When Baku ignored the request, Iran

sent a warship and two military aircraft to threaten the Azeri vessels

assessing the field.4

Secondly, the government’s policies have also been a factor in

Turkmenistan’s lack of success in developing its potential as an energy

giant and to diversify its markets. Although President Gurbanguly

Berdymukhamedov has attempted to increase his country’s diplomatic

2. “Turkmenistan”, Energy Information Administration, US Department of Energy,July 2015 at https://www.eia.gov/beta/international/analysis.cfm?iso=TKM

3. Paul Strionski, “Turkmenistan at Twenty-Five: The High Price ofAuthoritarianism”, Carnegie Endowment for International Peace, January 30,2017 at http://carnegieendowment.org/2017/01/30/turkmenistan-at-twenty-five-high-price-of-authoritarianism-pub-67839

4. LuçaZs Vasánczki, “Gas Exports in Turkmenistan”, Institut Français desRelations Internationales (IFRI), November 2011, p.17.


outreach by engaging with several neighbouring countries, including

state visits to Russia, India, Turkey, Kazakhstan, Iran and China among

others, in order to gain greater international legitimacy, attract

investments and to open up new markets for gas exports. He has

retained the policy of denying access to upstream energy assets to

foreign energy companies, with the exception of China.5 This has

contributed to the disincentive for potential partners in gas export

projects.

As a result, till recently, Turkmenistan was almost entirely

dependent on the Russian pipeline network infrastructure for

transporting its gas exports. Although it also exports around 8 billion

cubic metres (bcm) of gas to Iran annually, as well as some electricity

to Afghanistan, Iran, and Turkey through the Central Asian electricity

grid, these are small in volume. Hence, Ashgabat is keen to look for

alternative routes and outlets to export its gas to other markets. Having

adopted a foreign policy doctrine of ‘permanent neutrality’, this allows

the country to strengthen its independence and develop transit routes

and markets for hydrocarbons exports with a variety of states, without

getting involved with the geopolitical ambitions of its neighbours,

chiefly Russia.

The Russian Bearhug

Prior to its independence from the Soviet Union, Turkmenistan’s

energy relations were tied firmly to that of Moscow. However, being

a victim of its geographical location, since its independence in 1991,

although Turkmenistan has tried to shake off the shackles of its

powerful neighbour, the Ashgabat-Moscow gas relationship has been

fraught with several problems. Initially, most of its difficulties with

regard to energy exports – mainly natural gas which was its main

source of income – were related to the inability of Ukraine to pay for

Turkmen gas, Russia did not hesitate to cut the flow of Turkmen gas

westward to demonstrate its monopoly position as a conduit to foreign

markets. Finally, in 1995, Moscow stopped allowing Turkmen gas to

flow through its territory altogether, resulting in Turkmenistan’s gas

production falling drastically from 81.4 bcm in 1989 to 15.7 bcm in 1997.

5. Annette Bohr, note. 1.


Relations between the two countries worsened further following

Ashgabat’s involvement in the Trans-Afghan Pipeline, initiated by the

Argentinian company Bridas in 1991, and subsequently taken over by

Unocal in 1996 and renamed the CentGas project, which aimed to

transmit gas from Turkmenistan’s Daulatabad field through a $2 billion

pipeline via Afghanistan to Pakistan, and with a possibility of

extending the pipeline to India,6 which Moscow viewed as unfriendly.

Other differences between the two countries included their varying

positions on the legal status of the Caspian Sea, and Ashgabat’s official

withdrawal from the Commonwealth of Independent States (CIS).

Nevertheless, by the beginning of the century, the two governments

managed to resolve their differences, mostly because oil and gas prices

had started to increase. Noting that Moscow had been gaining from

buying cheaper gas from Turkmenistan and exporting it at a substantial

profit from sales to European customers, Ashgabat demanded an

upward revision of prices, to which Russia acceded, albeit after the

Turkmens threatened to terminate supplies. Finally, in 2006, a new price

was negotiated, with Gazprom agreeing to pay European prices. The

agreement was probably reached after Russia realised Europe’s

proclivity in looking for alternative supplies from Central Asia

bypassing Russia, and decided to base its strategy on (re)building

strong relations with former Soviet energy-rich states.7

However, the rapprochement did not last long, as by 2008, oil prices

had plunged again, and led to a massive drop in European demand,

causing Gazprom to suffer economically. While domestic economic

problems had caused demand for gas to drop, the EU’s release of its

Second Strategic Energy Review in 2008, which called for energy inter-

dependence – which is an euphemism for Europe’s attempt to reduce

its dependence on Russian supplies in the aftermath of the Russia-

Ukraine gas transit dispute – Moscow’s requirement for costly imports

from Turkmenistan have dropped drastically. But its contract with

Turkmenistan saw Moscow continuing with the imports until April

2009, when the Daulatabad-Dariyalyk pipeline suddenly exploded near

6. Martha Brill Olcott, “International Gas Trade in Central Asia: Turkmenistan,Iran, Russia and Afghanistan”, in Natural Gas and Geopolitics: From 1970 to 2040,Cambridge, 2006, pp. 217-219.

7. LuçaZs Vasánczki, no. 4.


the Uzbek-Turkmen border. Both sides accused the other of sabotage.

While the Turkmen’s blamed Gazprom for drastically cutting imports

without prior warning allegedly to adjust the pipeline pressure, and

accused it of violating the contract, Gazprom blamed the explosion on

Turkmen negligence as well as the aging pipeline infrastructure. Some

Russian analysts also saw a link between the timing of the explosion

and the imminent Southern Corridor Summit scheduled for May 2009,

implying that the blast was an example of Turkmen muscle flexing vis-

à-vis Moscow. The general consensus, however, was that the “accident”

was another example of Russian pipeline politics to stymie

Turkmenistan’s decision to build the East-West pipeline that would

circumvent Russian territory. The fact that the explosion took place

shortly after a meeting between Turkmen President Gurbanguly

Berdymukhamedov and the then Russian President Dmitri Medvedev

– wherein it was agreed that Russian companies would participate in

the East-West pipeline’s construction, but was followed soon after by

Turkmenistan announcing an open tender for the construction of the

pipeline – it was seen by Russia to be an indication that the project

could eventually become an important part of the European Southern

Corridor project, with Turkmenistan providing alternative gas exports

to Europe via a non-Russian route. Eventually, at the end of 2009, after

months of negotiations, both sides agreed to continue gas deliveries,

albeit reduced, with President Berdymukhamedov stating that Russia

was a long-term partner and his country was ready to boost gas exports

to Russia.8 However, relations between the two remained fractious, and

finally, in September 2016, Gazprom, which had reduced Turkmen gas

imports from 40 bcm in 2008 to 10 bcm a year in 2009, and further to

4 bcm a year in 2015, announced that it would halt imports completely

till 2018, in what was seen as a bid to weaken Turkmenistan’s position

as a rival gas supplier.9

Turning Towards China

The move towards diversifying Turkmenistan’s gas markets began in

8. Ibid.9. Sergei Blagov, “Russia sees new opportunities in Central Asia”, Asia Times,

October 7, 2016 at http://www.atimes.com/article/russia-sees-new-opportunities-central-asia/


2006 with the signing of an inter-governmental framework agreement

on gas and oil cooperation between President Hu Jintao and President

Nyazov. The agreement outlined plans for joint exploration, gas

purchases by China and the commissioning of the Trans-Asia Gas

Pipeline (TAGP). In 2007 CNPC was also granted a licence to explore

and produce gas in the Bagtyyarlyk area, making it the first and only

foreign company to obtain permission to carry out onshore gas

extraction activities in Turkmenistan along with a 30-year agreement

for supplying upto 30 bcm/y, which formed the basis for a new eastern

export route to China. Deliveries began in December 2009, making the

TAGP the first major pipeline from Central Asia to bypass the Russian

network. The first pipeline, known as Line A, carried gas from Turkmen

fields through Uzbekistan, Kazakhstan and Xinjiang province, before

joining up with China’s pipeline grid. Then in 2010, Line B was initiated

and together the two lines carried 30bcm/y. In 2012, China and

Turkmenistan signed another agreement to increase total exports to

China to 65 bcm/y by 2020, by adding another line – Line C – with a

25 bcm/y capacity which would run parallel to the one from

Uzbekistan and Kazakhstan, and in September 2013, China and

Turkmenistan agreed to launch yet another line – Line D – with a 25

bcm/y capacity, which would run through Uzbekistan, Tajikistan and

Kyrgyzstan, to China. This line was scheduled to be ready by 2016–

17, but has been delayed, reportedly due to slowing demand in China.

Although the project experienced delays in production by 2011, by

August 2013, Turkmenistan had delivered 60.645 bcm, which saw the

total Turkmen gas delivered to China to 138.6 bcmby May 2016. Now,

Ashgabat which had hoped that its volume to China would further

increase to more than 75-80 bcm following the completion of the Line

D, is now moving more actively on the TAPI pipeline to South Asia as

well as looking at the trans-Caspian pipeline project.10 (see Map 6.1)

Although the decision was apparently taken following the dispute

with Russia,11 a main reason for the success of the Sino-Turkmen deal

10. Ruslan Izimov, “China and Turkmenistan – a Regional Dimension”, Central AsiaBureau for Analytic Reporting, August 29, 2016 at http://cabar.asia/en/ruslan-izimov-china-and-turkmenistan-a-regional-dimension/

11. Chemen Durdiyeva, “China, Turkmenistan, Kazakhstan and Uzbekistan launchTurkmenistan-China Gas Pipeline”, Central Asia Caucasus Institute, January20, 2010 at http://old.cacianalyst.org/?q=node/5254


ap

6.1


was China’s policy of offering package deals in a manner that Western

companies cannot emulate. Apart from offering credit lines on soft

terms for gas complexes, including development of upstream projects,

albeit developed by Chinese firms using Chinese equipment, it also

offered billions of dollars in investment and built ‘turnkey factories’

at much lower rates than those offered by European firms. Moreover,

China has also invested in other sectors including telecommunications,

construction, light industry, pharmaceuticals, transport and chemicals.

As a result, China has managed to connect the Central Asian countries

via pipelines in record time, while Western firms have been waiting

for almost a decade for a southern route.12

The Search for New Markets – South Asia

Despite the successful relationship with China, Ashgabat is wary of

becoming overtly dependent on China due to a number of factors.

Some officials have expressed concern about China’s growing

dominance and mercantilist approach. For example, Turkmenistan

exports mainly raw materials to China, while China supplies

manufactured goods, which has negatively affected local businesses.

Moreover, the favourable conditions provided to Chinese workers has

led to expressions of grievances by other workers, both local and

foreign. Hence, in order to prevent ending up in a similar situation as

that faced with Russia, Turkmenistan is keen to diversify and look for

more export market options in the east to South Asia, and to the west

to the lucrative European market. Apart from reaching out to Turkey,

Japan and South Korea to develop projects in Turkmenistan for LNG,

gas-to-liquids, and manufacture of fertilisers from natural gas,

Ashgabat has been pursuing the TAPI (Turkmenistan-Afghanistan-

Pakistan-India) project to tap the potentially lucrative South Asian

market as part of its diversification strategy.

The project has its origins in the Trans-Afghan pipeline project,

which later became the Unocal-led CentGas project in the mid-1990s

following the signing of a memorandum of understanding between

the governments of Turkmenistan and Pakistan for a pipeline project.

Despite the demise of both projects due to the instability in

12. Annette Bohr, no. 1, p.78.


Afghanistan, the search for a project which would serve several

economic and geopolitical goals was not given up. As Richard Boucher,

former US Assistant Secretary of State for South and Central Asia, said

in 2007, one of the US’ goals was to stabilise Afghanistan and to link

South Asia and Central Asia so that energy can flow to the south.13

Moreover, Washington was keen to provide an alternative to the IPI

(Iran-Pakistan-India) gas pipeline project in pursuit of its sanctions

policy against Tehran.

In April 2008, the Asian Development Bank (ADB) outlined the

details of a feasibility study of a project that was initially completed

in 2005 at a meeting of the four participating countries, namely,

Turkmenistan, Afghanistan, Pakistan and India. The ADB reported that

the estimated capital cost was $7.6 billion and said it would consider

financing for the project. The project was expected to transport 33 bcm

of natural gas from Turkmenistan’s Galkynysh field to South Asia, with

Afghanistan receiving 14 million standard cubic metres a day

(mmscmd), and India and Pakistan each receiving 38 mmscmd. But

since then, a decade has passed, with no sign of the commencement

of the project as it remains mired in problems associated with selection

of a secure route, ensuring supplies, pricing, and most importantly,

selection of a consortium. Initially, US oil majors Chevron and

ExxonMobil had expressed their interest in assuming that role.

However, after Ashgabat refused to allow them an equity stake in the

Galkynysh field in exchange for assuming the risk of construction on

the grounds that Turkmen policy of limiting production sharing

agreements (PSAs) to its offshore reserves only, both companies

withdrew from the project although Turkmenistan signed an onshore

PSA with CNPC for its Bagtyýarlyk onshore natural gas project in the

southeast, the only foreign company to be allowed one in

Turkmenistan.14 France’s Total S.A., was considered thereafter as the

13. John Foster, “Afghanistan, the TAPI Pipeline, and Energy Geopolitics”, Journalof Energy Security, March 23, 2010 at http://ensec.org/index.php?option=com_content&view=article&id=233:afghanistan-the-tapi-pipeline-and-energy-geopolitics&catid=103:energysecurityissue content&Itemid=358

14. Sarah Lain, “European Energy Security and Turkmenistan”, The Diplomat,January 13, 2015 at http://thediplomat.com/2015/01/european-energy-security-and-turkmenistan/


leading candidate as was Russia’s Rostec and CNPC, and there were

reports that more than one consortium was also being considered.15

However, to date, no consortium leader has been selected. In the

meantime, the cost of the project has escalated from the original $7.7

billion to around $10-12 billion, making its future uncertain.16

Nevertheless, all the partners involved in TAPI, remain optimistic

that the project, albeit delayed, would see the light of day. As India’s

external affairs minister Sushma Swaraj said, “Our energy needs are

rising. Our needs in the agriculture sector and want for fertilisers are

also rising. In both these areas, Turkmenistan can be our partner” and

said that India was willing to build a fertiliser plant in Turkmenistan.17

However, there are several doubts regarding the project, including

security concerns, gas pricing, transit fees and the refusal by

Turkmenistan to give equity stakes in its hydrocarbon blocks, which

saw several international oil firms opting out of the project.

Recently, despite Pakistani media reports stating that construction

on the Pakistani portion of the project would commence in February

2017, and that a German project management consultant had been

appointed, that a consortium of Japanese companies had being

awarded the contract for developing the gas field in Turkmenistan and

that a Chinese company had won the contract for laying the pipeline

over Turkmen territory,18 there have been subsequent reports regarding

further developments.

Moreover, there are concerns that China may yet put a spoke in

the TAPI wheel. Beijing wants to be the dominant market in Turkmen

gas exports and the TAPI project does not fit into its strategy of energy

15. Micha’el Tanchum, “Turkmenistan Poised for TAPI Breakthrough”, The CentralAsia-Caucasus Analyst, March 18, 2015 at http://www.cacianalyst.org/publications/analytical-articles/item/13165-turkmenistan-poised-for-tapi-breakthrough.html

16. Ibid.17. “Turkmenistan’s rising gas production and international exports: A Guide”,

April 9, 2015, ITE Oil & Gas at http://www.oilgas-events.com/market-insights/turkmenistan/turkmenistan-s-rising-gas-production-and-international-exports-a-guide/801782978

18. Zafar Bhutta, “Japan, China companies win contracts for TAPI project”, ExpressTribune, August 24, 2016 at https://tribune.com.pk/story/1169388/energy-supplies-japan-china-companies-win-contracts-tapi-project/


and indeed, overall foreign trade in Eurasia, with Turkmenistan being

an important part of its One-Belt-One-Road initiative, both in terms

of energy supplies as well as a transportation and transit hub, through

which China would like to access the Gulf markets. Furthermore, as

far as China is concerned, the main beneficiary of the project will be

the US, given that it was initiated by Washington as a counter to Iranian

gas exports to South Asia, and would allow the US to enhance its

influence in the region if the project was realised.19

To Europe

Another potential – and perhaps the most lucrative – market for

Turkmen gas, is Europe. Since the mid-1990s, Turkmenistan has been

looking for a western route to export its gas to the lucrative European

market, and in fact, one of the reasons for its gas trade swap deal with

Iran was the latter’s location as the most direct and cost-effective route

to Europe via Turkey. However, Western and US sanctions did not

allow any project involving Iran and as an alternative, the US promoted

the construction of the 2,000-km Trans-Caspian Pipeline (TCP), which

envisaged transporting gas under the Caspian Sea to Azerbaijan, and

on to Europe via Georgia and Turkey. While negotiations began to yield

some results around 2000, differences between Azerbaijan and

Turkmenistan developed following Baku’s demand for a larger share

of the pipeline’s capacity, and after the then President Saparmurat

Niyazov objected to the Azeri demand on the grounds that it would

make the project unprofitable for Turkmenistan, the project was

abandoned.20

Meanwhile, as concerns surfaced regarding the prospect of facing

shortages after 2019, when the gas contract between Russia and

Ukraine was expected to expire, the EU began to pursue its programme

of identifying alternative supply sources, and increased negotiations

over various gas pipeline initiatives under its Southern Corridor project

– including the Trans-Caspian Pipeline – with the respective suppliers.

Although the financial benefits were not its main concern,

Turkmenistan, in the interest of gaining more markets, agreed to sign

19. Ruslan Izimov, no. 10.20. Annette Bohr, no. 1, p.86.


on. Hence, in May 2015, along with Azerbaijan and Turkey,

Turkmenistan signed the Ashgabat Declaration with the European

Union, which stated that all the signatories supported the creation of

favourable conditions necessary for ensuring reliable, stable and long-

term international energy cooperation taking into account the interests

of producers, transit countries and consumers of energy resources. (see

Map 6.2) Significantly, the declaration recognised the importance of

the equal and mutually beneficial cooperation in ensuring the supply

of natural gas from Turkmenistan to Europe.21

In a further development, in November 2014, Turkmengaz signed

a framework agreement with Turkey to supply the Trans-Anatolian

Natural Gas Pipeline project (TANAP), which forms another section

of the EU’s Southern Gas Corridor project. The project proposes to

transport gas from Azerbaijan’s Shah Deniz II field in the Caspian Sea

to Europe via Turkey.22 But despite its potential to provide Europe with

a supply source that would allow it to become less dependent on

Russia, the TCP project presents several challenges, the chief being the

legal status of the Caspian Sea and the conflict over ownership rights.

Russia has opposed the project from the very beginning on the basis

that the status of the Caspian Sea has to be first clarified. However,

even several rounds of negotiations between the leaders and officials

of the five littoral states have not succeeded in coming up with a

consensus over how the Caspian – and its resources – should be

divided. Moreover, Russia, with the support of Iran, has also expressed

concerns about environmental consequences of a pipeline running

across the Caspian Sea bottom, clearly to prevent its neighbours from

constructing an alternative transport route, and has threatened to file

a legal challenge to the construction of the TCP, which could hold up

the project for years. Meanwhile, all five Caspian littorals have been

building up their navies, although the Russian navy is the clear

21. Huseyn Hasanov, “Turkmenistan, Azerbaijan, Turkey sign energy declarationwith EU”, Trendz News Agency, May 1, 2015 at http://en.trend.az/business/energy/2390411.html

22. Catherine Putz, “Europe could be getting Turkmen gas by 2020”, The Diplomat,May 5, 2015 at http://thediplomat.com/2015/05/europe-could-be-getting-turkmen-gas-by-2020/


ap

6.2


dominant power.23 Not to be deterred, Ashgabat and the EU have been

looking at other options. European Commission Vice-President Maros

Sefcovic is also discussing other potential delivery options with

Turkmenistan, including the possibility of transiting Turkmen gas via

Iran. While a pipeline transporting Turkmen gas to Iran already exists,

by building a 200-km pipeline from Tehran to Esfahan, Turkmen gas

could be included. A pipeline from Esfahan to the Turkish border

already exists and could be used to transport Turkmen gas as well.24

A third option is to build a cross-country pipeline from South Pars

gas field towards Iran’s north-eastern regions bordering Turkmenistan,

known as the 11th cross-country pipeline. The pipeline has the capacity

to transfer 100 mcmd of gas, and is aimed to make these regions self-

sufficient instead of relying on Turkmen gas imports. Another Iranian

project which is on the anvil, is a 1,860-km cross-country pipeline,

projected to transfer 110 mcmd of gas from the South Pars gas field

towards the Iran-Turkey border. If an agreement can be reached, Iran

could sign a gas swap deal with Turkmenistan and Turkey by

eliminating the 11th cross-country pipeline and accelerate the

construction of the South Pars cross-country pipeline instead.25 In fact,

the prospects of Iran-Turkmen cooperation in supplying gas to Europe

was one of the main issues discussed during Iranian President

Rouhani’s visit to Turkmenistan in mid-March. However, with a larger

gas reserve base than Turkmenistan, Iran is more likely to emerge as

a competitor rather than a trade partner to Turkmenistan. To make

matters worse, Iran has, according to reports, recently declared that it

may completely stop importing Turkmen gas in the near future

following a dispute over payments, following a halt in gas exports by

Ashgabat.

Meanwhile, around 2010, Turkmenistan had also begun

constructing the East-West pipeline, with a projected capacity of

23. Qishloq Ovozi, “Still One Big Obstacle to Turkmen Gas to Europe”, Radio FreeEurope Radio Liberty, June 8, 2015 at http://www.rferl.org/content/turkmenistan-natural-gas-europe-trans-caspian-pipeline/26996003.html

24. “Potential routes for delivering Turkmen gas to EU”, Natural Gas Europe, May4, 2015 at http://www.naturalgaseurope.com/potential-routs-for-delivering-turkmen-gas-to-eu-23508

25. Ibid.


30 bcm/y. Once completed, it would allow gas from its eastern fields

to the Caspian coast. At the same time, the pipeline could also allow

supplies to be delivered to any customer, thereby increasing the

country’s supply diversification options.26 Interestingly, the original

plan was to feed gas into the Russian-backed Prikaspiisk pipeline, but

after difference over pricing emerged with Gazprom, which was

originally tasked with the construction of the pipeline, the project was

scrapped, thereby freeing the gas that was dedicated for the project,

for export elsewhere. At the time, it appeared that with Russia no

longer interested in importing Turkmen gas, and with no additional

volumes allocated to Iran, Ashgabat’s intention to go ahead with the

project was to prepare for gas exports via the TCP.27 Whatever the

intention, the pipeline was inaugurated in December 2015, with the

potential to be linked with the TCP through a 300 km sub-sea pipeline

under the Caspian Sea.

Despite these initiatives, Ashgabat does not display much urgency

in either the TCP or any other project linked with the Southern Gas

Corridor. Moreover, despite the very distinct possibility of Turkmen

gas flowing into Europe, the prospect for this eventuality remains far

from certain as both politics and logistics may get in the way. In order

to hook into any pipeline associated with the Southern Gas Corridor,

Turkmenistan will need to build a pipeline under the Caspian’s

disputed waters, which remains deeply contentious, with none of the

five littoral states – Azerbaijan, Iran, Turkmenistan, Kazakhstan and

Russia – showing any signs of compromising for the sake of a

resolution. And as one of the central purposes of building the pipeline

is to circumvent Russia, the most likely scenario is that Moscow will

continue to play the spoiler in delineating the waters.28

However, with the fall in gas prices, high production costs and

China’s recent policy to develop its domestic shale gas resources,

Turkmenistan is now looking for other alternatives. Moreover, the

fourth phase of the pipeline to China – Line D – which runs through

26. Ibid. p. 81.27. “The momentum for the trans-Caspian pipeline”, Natural Gas Europe, July 14,

2015 at http://www.naturalgaseurope.com/the-momentum-for-the-trans-caspian-pipeline-24590

28. Catherine Putz, no. 22.


Uzbekistan, Tajikistan and Kyrgyzstan, is now facing several problems,

raising concerns whether it will ever be completed. And now with the

TAPI project too mired in problems over pricing in the current low

price environment, selling to Russia, albeit on unfavourable terms, is

looking like the only gas export option open to Ashgabat, at least for

the time being.29

During Russian Foreign Minister Sergey Lavrov’s visit to

Turkmenistan in January 2016, President Berdymukhamedov extended

an invitation to President Putin to make an official trip to the country.

During the talks with Lavrov, the issue of reviving gas exports to Russia

was discussed. The termination of gas exports to Russia has been

detrimental to both countries, despite the increase in supplies to China.

Given that the gas supplies to China are given as payment for the loans

and other infrastructure assistance, and the Iran-Turkmen gas trade is

also done under a barter deal, Turkmenistan requires hard cash, which

Gazprom provided. On the other hand, Turkmen gas supplies

comprised 30 percent of all Russian gas exports to third countries.

Therefore, it would be in the interest of both sides to come to some

understanding on gas prices and resume the trade. However, much

will depend on Turkmenistan’s flexibility on prices, as well as its

willingness to consider Russian interests with regard to export routes

and construction of pipelines.30

Representatives of Turkmenistan have also recently been to the UK

to talk about expansion of bilateral cooperation between the two

countries in order to import Turkmen gas. Currently, British companies

such as Shell work in Turkmenistan, and relations between the nations

are good.31

29. Qishloq Ovozi, “Russia Flexes Its Muscles In Turkmenistan”, Radio Free Europe,June 29, 2016 at http://www.rferl.org/content/russia-flexes-muscles-turkmenistan-gas-exports/27793499.html

30. Arkady Dubnov, “A new Russian turn to Turkmenistan?”. Carnegie Endowmentfor International Peace, February 18, 2016 at http://carnegieendowment.org/publications/?fa=62814

31. “Turkmenistan’s rising gas production and international exports: A Guide”, no.17.


Ashagabat’s Quandary

Turkmenistan certainly has the potential to become a serious player in

the gas market, particularly after the announcement that more reserves

had been discovered in the Galkynish field. However, despite the

current leadership under President Gurbanguly Berdymukhamedov

reversing some of his predecessor, Saparmurat Nyazov’s, policies and

investing substantially in developing the country’s infrastructure, the

principal aim of the regime continues to be self-preservation; one of

the main tools of the leadership is to continue with its policy of

complete state control of the state’s energy resources and centralisation

and control of revenues from hydrocarbon exports, which is used to

finance security services and patronage networks. But despite falling

global energy prices, the slump in the Russian Rouble and a slowdown

in China’s economy, Turkmenistan’s leadership has not reversed its

decision to review its longstanding policy of refusing to grant buyers

equity stakes in upstream fields, and there are signs that Ashgabat may

now be more open to other markets to increase its options.

First, while its dependence on China as a gas export market is

poised to increase, following the 2014 deal with Russia, Beijing has

other alternatives, making Turkmenistan more vulnerable to Chinese

pressures with regard to prices, which in turn has impacted severely

with the country’s economy. Beijing already pays well below the

European prices for its Turkmen imports, and may negotiate for even

lower prices in the future. Second, despite the robust energy

cooperation, Sino-Turkmen relations have their share of problems,

with some Turkmen officials expressing concern about the growing

dependence on China. Third, with the slowdown in the Chinese

economy, China may cut its energy imports. The fact that there has

been no movement on the fourth phase of the Turkmen-China

pipeline is a clear indication. Finally, with deepening energy ties with

Russia, as was evidenced by the slew of recent oil and gas deals

signed between the two countries over and above the 2014 mega gas

deal, Turkmenistan’s plans to increase exports to China may be

affected.

With Turkmenistan’s economy substantially dependent on

revenues accruing from hydrocarbon exports, the fall in prices has seen


its economic growth rate come down from 10 percent in 2013-14, to

6.5 percent in 2015. The World Bank has predicted that it may fall

further in 2016 to 6.2 and rise again to 6.5 in 2017.32 Thus far, Ashgabat

has not shown much interest in focusing on expanding its exports

westwards, despite the EU’s overtures. However, as most forecasts

show that even if oil prices recover over the next few months, gas prices

are expected to remain low over the next few years. As new producers

enter the market concurrently with falling demand, Turkmenistan may

well be more willing to cooperate with the other participants of the

Southern Gas Corridor.

32. “Global Economic prospects: Weak Investment in uncertain times” Europe andCentral Asia, World Bank, January 2017, http://pubdocs.worldbank.org/en/613131481727532936/Global-Economic-Prospects-January-2017-Regional-Overview-ECA.pdf

7ARCTIC – THE LAST GAS FRONTIER

For years, the presence of large reserves of energy resources,

particularly natural gas, in the Arctic region has been known and

exploration activity has been carrying on intermittently since the 1920s.

Various assessments of the reserves have been made, although the 2008

report of the US Geological Survey, which claimed that the Arctic is

estimated to hold around 22 percent of the world’s energy resources,

with around 90 billion barrels or 13 percent of the world’s untapped

oil and 30 percent of natural gas reserves, besides vast quantities of

mineral resources, such as rare earth elements, iron ore, and nickel, is

deemed most accurate. But while some states like Norway and Russia

had been exporting oil and gas from their fields, and Iceland and

Greenland were actively pursuing exploration in their territorial

waters, the harsh climate of the region and dense ice cover had made

it difficult and economically challenging to prospect for energy in the

region. As a result, the region had remained free from great power

politics. But several events in the recent past have gradually seen the

hitherto tranquil environment of the Arctic emerge as a geopolitical

hotspot.

More than any action by a State, it is climate change that has

emerged as the most effective actor that has changed the peaceful,

almost languid pace of the region. The advent of global warming that

has led to the melting of large swathes of the ice cover in the Arctic

has rendered the region more accessible than ever before. Currently,

Arctic – The Last Gas Frontier 127

the polar ice cap is 25 percent less than it was in the 1970s, and the

summer ice in the Arctic Ocean has been decreasing at a rate of about

8 percent per decade, while the thickness of the sea ice has decreased

by approximately 40 percent. As a result, while in the past, it was

almost impossible to access the region due to thick year-round sea ice,

today global warming has increased the navigability of the Arctic. In

2005, the Northeast Passage (or the Northern Sea Route) opened up

along the Eurasian border for the first time while the Northwest

Passage along Canada opened up in 2007.1 These new sea lanes will

substantially reduce maritime distances for commercial shipping.

According to the US Navy, by 2030, the Northern Sea Route from the

Kara Strait to the Pacific will see nine weeks of open water. This would

cut the time taken to travel between European ports and East Asia by

35-60 percent as against the routes through the Suez or Panama Canals.

At the same time, the Northwest Passage, which connects the Atlantic

and Pacific Oceans through the Canadian Arctic Archipelago, which

was completely non-navigable earlier, will have five weeks of open

water by 2030, and will cut transportation time by 25 percent between

Europe and the US than non-Arctic routes. The opening up of new

passages has implications not just for trade in general but also for access

to the vast energy resources in the region, seen as the last frontier of

conventional energy reserves.2 And it is not just the six littoral Arctic

nations that are vying for extending their influence in the region, but

some extra-regional states, are looking to raise their profile here as well.

Before the current drop in the price of oil and gas, fierce competition

had broken out among the five Arctic states – namely, Norway, Denmark

(Greenland), Russia, Canada and the US – with each claiming rights not only

to the resources in the 200 nautical mile economic zone (EEZ) around

their coasts under international law, but also in extending their territorial

sovereign rights in order to exclusively exploit all natural resources

within their economic zones. (See Map 7.1)

1. Heather Conley and Jamie Kraut, “U.S. Strategic Interests in the Arctic AnAssessment of Current Challenges and New Opportunities for Cooperation”,Center for Strategic and International Studies (CSIS), April 2010 at http://csis.org/files/publication/100426_Conley_USStrategicInterests_Web.pdf

2. Sohrab Ahmari, “The New Cold War’s Arctic Front”, The Wall Street Journal,June 9, 2015 at http://www.wsj.com/articles/the-new-cold-wars-arctic-front-1433872323


Map 7.1

Russia Raising its Stakes

Despite its seemingly decreasing profile in the global theatre, Moscow

has always perceived the High North as an important strategic domain,

and has striven to strengthen and retain its hold over the region. In

2001, Russia made an official submission to the UN Commission on

the Limits of the Continental Shelf (UNLCS), in accordance with the

United Nations Convention on the Law of the Sea (UNCLOS), claiming

an extension of territory beyond the 200-nautical-mile EEZ, namely

the Lomonosov Ridge and Mendeleev Ridge on the grounds that the


Arctic Ocean seabed is a projection of the Siberian continental platform.

But it was not till August 2007, when a steep rise was seen in the price

of oil, that a Russian expedition called Arktika 2007, descended to the

seabed at the North Pole and planted the Russian flag and took water

and soil samples for analysis to be used as evidence to their claim to

the mineral riches of the Arctic.3 The Russian action sparked off a chain

reaction of expeditions from other states. A few days later, the US sent

a coast guard icebreaker to the Bering Sea, ostensibly to study global

warming and its consequences for the region, while the Canadian

government issued statements reiterating its sovereignty over the

Arctic, and launched a “sovereignty operation” known as Operation

Nanook, involving naval manoeuvres in the region. The Danish

government too launched an Arctic scientific expedition around the

same time, with instructions to gather evidence that the Lomonosov

Ridge was an underwater extension of Greenland, not Russia, in order

to support Denmark‘s territorial claims in the Arctic.4

Russia’s action was no doubt set off by the fact that its existing

energy assets were in decline and given its strategy of using its status

as an energy superpower as a foreign policy tool, the need to ensure

its hold on the Arctic’s unexplored hydrocarbon wealth was seen as

crucial. Concerned by the increasing human activity due to the ice melt

and opening up of new sea routes and the growing ingress of more

countries, including China, in the region, a major goal for Russia is to

preserve its role as a leading Arctic power and transform the Arctic

into a top strategic base for natural resources by 2020. Accordingly, in

September 2008, the Russian government adopted a new Arctic strategy

enunciated in a document, entitled “The fundamentals of state policy

of the Russian Federation in the Arctic in the period up to 2020 and

beyond”, that was published on the ‘Russian Security Council’ website

in the end of March 2009. The document emphasised the region’s

importance to Russia’s economy as a major source of revenue, mainly

3. Shamil Midkhatovich Yenikeyeff and Timothy Fenton Krysiek, “The Battle forthe Next Energy Frontier: The Russian Polar Expedition and the Future of ArcticHydrocarbons”, Oxford Institute for Energy Studies, August 2007 at http://www.oxfordenergy.org/wpcms/wp-content/uploads/2011/01/Aug2007-TheBattleforthenextenergyfrontier-ShamilYenikeyeff-and-TimothyFentonKrysiek.pdf.

4. Ibid.


from energy production as well as from maritime transport. It also

states that defining the limits of the country’s continental shelf by 2015

was a top priority and that Russia aimed to deploy a combined-arms

force in the region by 2020.5

Although low oil prices since 2014, combined with Western

sanctions imposed after Russia’s annexation of Crimea saw new

offshore projects being mothballed, Russian military presence did not

see a slowdown, and in fact, strengthened its Northern Fleet defence

forces to strengthen its Arctic position even further. It is building

nuclear icebreakers to strengthen its existing fleet of around 40

breakers, which are used to clear channels for military and civilian

ships.

In fact, for Moscow, establishing its dominance over the region has

become even more important following its annexation of the Crimea

and the subsequent imposition of sanctions. With only a handful of

oil companies having the technological expertise and experience

required to extract oil and gas from the harsh Arctic environment, and

Russian state firms like Gazprom and Rosneft having limited

experience with such challenging projects, Russia is looking beyond

Europe and the US for investment and partnerships to develop its

Arctic resources. Moreover, with many of its older fields depleting

rapidly, Russia needs access to the Arctic’s energy resources to ensure

that it can deliver gas to China following the May 2014 $400 billion

deal it has signed with China. More recently, in May 2015, the two

countries announced more joint projects, including the development

of shelf deposits in Russia’s Arctic and Far Eastern regions.6 Chinese

energy company PetroChina has purchased a 20 percent stake in the

Yamal LNG project for an undisclosed sum and in 2014, China and

5. Katarzyna Zysk, “Russia’s Arctic Strategy: ambitions and constraints”,Geopolitics in the North, June 15, 2009 at http://www.geopoliticsnorth.org/index.php?option=com_content&view=article&id=84:arctic-strategy-documents&catid=52&showall=&limitstart=2 and J. Michael Cole,“Militarization of the Arctic Heats Up, Russia Takes the Lead”, The Diplomat,December 6, 2013 at http://thediplomat.com/2013/12/militarization-of-the-arctic-heats-up-russia-takes-the-lead/

6. Sergei Blagov, “Russia’s partnership with China: An alliance of necessity”, AsiaTimes, May 10, 2015 at http://atimes.com/2015/05/russias-partnership-with-china-an-alliance-of-necessity/


Russia issued a joint statement which included a note that Russia will

facilitate the shipment of Chinese goods through the Northern Sea

Route, as well as its railways and ports.7

Interestingly, Russia was also keen to cooperate with Japan in the

Arctic. Although economic factors are a major consideration as

diversifying the number of markets is in its interest, balancing China’s

increasing reach is also a factor pushing Moscow closer to Tokyo. In

fact, Moscow supported Japan’s candidacy for observer status at the

Arctic Council. For Japan too, while balancing China is a factor in

remaining engaged in the Arctic, the region’s hydrocarbon resources

and the Northern Sea Route (NSR) is important for Japan as it provides

an alternative route for Japan to transport its energy imports from West

Asia, reducing reliance on the Straits of Hormuz and Malacca. Japan

has even appointed a special ambassador in charge of Arctic affairs.

Currently, the three main areas of Russo-Japanese cooperation in the

Arctic include research, the NSR and the Yamal LNG project, in which

it has conveyed its interest to Russia.8

The US Turns to the Arctic

Russia’s Arctic build-up has not gone unnoticed in Washington, with

the new US Defense Secretary James Mattis stating at his confirmation

hearing in January 2017 that it was not to the US’ advantage to leave

any part of the world to others.9 Despite being an Arctic state, the US

only began looking at the Arctic strategically during the latter years of

the George W. Bush administration in 2009 when it released a

presidential directive establishing a new US policy for the Arctic. The

policy stated that the US had national security and homeland security

interests in the region and discussed a number of issues related to the

Arctic, including among others, maritime transportation and economic

7. Bree Feng, “China Looks North: Carving Out a Role in the Arctic”, Asia PacificFoundation of Canada, April 30, 2015 at https://www.asiapacific.ca/canada-asia-agenda/china-looks-north-carving-out-role-arctic

8. Mina Pollmann, “How Japan and Russia Cooperate in the Arctic”, The Diplomat,March 10, 2016 at http://thediplomat.com/2016/03/how-japan-and-russia-cooperate-in-the-arctic/

9. Andrew Osborn, “Putin’s Russia in biggest Arctic military push since Sovietfall”, Reuters, January 31, 2017 at http://www.reuters.com/article/us-russia-arctic-insight-idUSKBN15E0W0


issues, including energy.10 Thereafter, in May 2010, the Obama

Administration released a national security strategy document that

stated, among other things, that the US had broad and fundamental

interests in the Arctic region, where it sought to meet the country’s

national security needs, protect the environment and responsibly

manage resources.11

That the US is looking at the Arctic from a geopolitical perspective

comes out clearly from a report that was published in March 2015 by

the National Petroleum Council (NPC). In October 2013, following a

request by the Energy Secretary, the NPC conducted a comprehensive

study on the research and technology opportunities in the Arctic to

enable prudent development of oil and gas resources. Among other

things, the report stated that the US has large offshore oil potential,

akin to Russia, and larger than that of Canada and Norway, and

supported exploration in the region. The rationale was that despite the

shale revolution in the country that had enhanced its oil and gas

output, production from shale would decrease by 2040 according to

the Department of Energy’s Energy Information Administration’s (EIA)

2014 estimates. Therefore, given long timelines for developing Arctic

resources, exploration in the region now could add to US production

in the future and enhance the US’ energy security.12

It further adds that the other Arctic countries were pursuing oil

and gas exploration in the region; hence to remain globally competitive

and to position itself to provide global leadership and influence in the

Arctic, the US should facilitate exploration in the offshore Alaskan

Arctic now.13

Under these circumstances, Washington’s overturning its January

2015 ban on developing some areas of the Arctic coast citing

environmental reasons, and granting of conditional approval on May

10. “National Security Presidential Directives – NSPDs”, The White House, January9, 2009 at http://fas.org/irp/offdocs/nspd/nspd-66.htm

11. “National Security Strategy”, The White House, May 2010 at https://www.whitehouse.gov/sites/default/files/rss_viewer/national_security_strategy.pdf

12. “Arctic Potential: Realizing the Promise of U.S. Arctic Oil and Gas Resources”,Draft Report of the National Petroleum Council, March 27, 2015 at http://www.eenews.net/assets/2015/03/30/document_cw_01.pdf

13. Ibid.


11, 2015, to a plan by Shell Gulf of Mexico to begin exploratory drilling

in the Chukchi Sea, is not surprising, given that the Arctic represents

one of the last remaining unexplored energy frontiers.14

The US has limited international legal jurisdiction over exploration

in the Arctic because it is not party to the United Nations Convention

on the Law of the Seas (UNCLOS). UNCLOS establishes that the five

nations bordering the Arctic are granted EEZ of 200 nautical miles off

their coasts. However, without being a party to UNCLOS, Washington

cannot secure international legal titles to sites more than 200 miles off

the coast. If ratified, the US could gain recognised international rights

to 600 miles of the extended Continental Shelf. Other countries, notably

Russia and Canada, have submitted claims that reach to the North Pole.15

Growing Militarisation

In mid-December 2014, Denmark, together with Greenland, filed a

submission to the UNCLCS, claiming ownership of around 900,000

square kilometers of the Continental Shelf in the Arctic Ocean,

becoming the first country to attempt to claim outright ownership of

the North Pole. Canada too made overlapping claims to the North Pole

and large swathes of the territory, as did Russia, and Norway has been

moving troops and equipment to the region, as well as moved its Coast

Guard headquarters further north and based its largest active army

unit above the Arctic Circle.16

In December 2014, Russian President Vladimir Putin signed a new

military doctrine for the country. The new doctrine, while focusing on

the threat emanating from the expansion of NATO, also mentioned

the need for Russia to extend its influence in the Arctic region.

According to some Russian media reports, Moscow believes that with

14. John Warrick, “One step closer to Arctic drilling? Obama administration grantsShell ‘conditional’ approval”, Washington Times, May 11, 2015 at http://www.washingtonpost.com/news/energy-environment/wp/2015/05/11/one-step-closer-to-arctic-drilling-obama-administration-grants-shell-conditional-approval/

15. “The Arctic – America’s Last Energy Frontier” at http://www.americansecurityproject.org/energy-security/the-arctic-americas-last-energy-frontier/

16. Elisabeth Braw, “Putin Makes His First Move in Race to Control the Arctic”,Newsweek, January 6, 2014.


the increase in turmoil in West Asia, more and more countries will look

increasingly to the Arctic. To this end, Russia has embarked on a spate

of port constructions across the Arctic, and is upgrading its other

military capabilities in the region as well.17 In October 2014, the Russian

defence minister, Sergei Shoigu, announced that military units would

be deployed all along its Arctic coast, and construction of military

facilities have commenced on Cape Schmidt in Russia’s far east and

on the country’s Arctic Wrangel and Kotelny Islands. It also has plans

to construct several airfields as radar stations, with an airport at Cape

Schmidt – known as Mys Shmidta in Russian – which was reopened

at the end of 2015. It has already reopened its northern Alakurtti

military base near the Finnish border, and at the end of 2014, President

Putin announced that Russia’s Arctic command had become

operational.18 Meanwhile, the other Arctic littorals, including the US,

Canada and Norway too, are developing surveillance sensors to

provide for traffic-monitoring capabilities in the region.19

It is not only the Arctic littorals that are displaying interest in the

region. Although the jurisdiction of the Arctic region falls under the

Arctic countries, viz. Canada, Denmark (Greenland), Norway, Russia

and the US (Alaska) as well as the Arctic Council (AC) members

namely Sweden, Finland and Iceland, in 2013, six non-Arctic countries

– China, India, Italy, Japan, South Korea and Singapore – were inducted

as permanent observers, albeit with no voting rights. On May 15, 2013,

the Arctic Council Secretariat adopted the Kiruna Declaration, which

stated that the members:

“Recognize the central role of business in the development of theArctic, and decide to increase cooperation and interaction with thebusiness community to advance sustainable development in the

17. Jeremy Bender, “Russia Is Militarizing the Arctic”, Business Insider, December3, 2014 at http://www.businessinsider.in/Russia-Is-Militarizing-The-Arctic/articleshow/45354606.cms

18. Elisabeth Braw, “Putin Makes His First Move in Race to Control the Arctic”,Newsweek, January 6, 2015 at http://www.newsweek.com/2015/01/16/putin-makes-his-first-move-race-control-arctic-296594.html

19. John Keller, “Arctic surveillance is the result of East-West political tensions inthe polar regions”, Military & Aerospace, March 3, 2015 at http://www.militaryaerospace.com/articles/2015/03/arctic-surveillance-blog.html


Arctic....”20 thereby acknowledging the central role of business,including the development of hydrocarbon resources, in thedevelopment of the Arctic.

China’s Arctic Strategy

Of all the extra-regional countries, China has been the most proactive

in the region. As far back as 2009 and 2010, China had disputed any

claims of sovereignty in the Arctic waters beyond the twelve-mile zone

granted to littoral countries who have signed the UNCLOS with Rear

Admiral Yin Zhuo of the Chinese Navy, stating in May 2010, that the

Arctic belongs to all the people around the world as no nation has

sovereignty over it. He also went on to say that exploitation of the

Arctic will become a future mission of the (Chinese) navy.21

China is also developing its bilateral, mostly commercial and

economic relations with small Arctic states, particularly Iceland. In

April 2012, Prime Minister Wen Jiabao toured Iceland as well as

Sweden in a bid for gaining their support for permanent observer status

after Denmark too stated that it would support China’s position. In

fact, taking advantage of Iceland’s financial problems emanating from

the 2008-09 crisis, China had increased its cooperation with Iceland,

which had in turn allowed Beijing to increase its profile in the region.

China is investing in joint energy, minerals exploitation and Arctic

navigation projects with the smaller Arctic countries.

Officially, China claims that it does not covet the Arctic for its

resources, but rather has a genuine interest in the future of the region.

“China’s activities are for the purposes of regular environmental

investigation and investment and have nothing to do with resource

plundering and strategic control,” the state-controlled Xinhua news

agency wrote in 2012.

However, the general perception is that China is eyeing the Arctic

for three main reasons:

20. Arctic Council Secretariat, Kiruna Declaration, Kiruna, Sweden, May 15, 2013,Arctic Council (accessed on May 25, 2014).

21. Olga Alexeeva and Frédéric Lasserre, “China and the Arctic”, Arctic Yearbook2012, p.84 at http://www.researchgate.net/profile/Olga_Alexeeva/publication/259042084_China_and_the_Arctic/links/0c960529ce2575a172000000.pdf


Heavy dependence on exports, apart from the vast energy resource

potential of the region and the opening up of a shorter sea route due

to the melting Arctic sea ice that will save the country billions of dollars

in transportation costs as well as time. For example, the distance from

Shanghai to Hamburg is 2,800 nautical miles shorter via the Arctic than

via the Suez Canal. Moreover, being the world’s largest fishing nation,

the Arctic may become a new and important fisheries frontier.22

Although some Arctic countries are wary of China’s ambitions in

the region, barring the US, many of them are working with China on

developing resources; the rationale being that unlike the US, Canada

and Russia, they supported the integration of the Arctic region into

the global economy to prevent the Arctic Council from becoming too

inward-looking.23

In fact, China’s inclusion in the Arctic Council was partially due to

strong support from the Nordic nations, and currently Russia. Beijing

signed a free trade agreement with Iceland in 2013 and has built a new

embassy there. Chinese resource companies have also invested $400

million in energy and mining projects in the Canadian Arctic and have

committed to invest $2.3 billion in a mammoth, British-led mining project

in Greenland. A Chinese mining company has taken over an iron ore

mine in Greenland while talks are on between the government and two

Chinese companies interested in mining in Greenland. Denmark too

has stated that it is willing to work together with China to explore new

Arctic sea routes, while Norway and Chinese state-owned oil company

CNOOC are partnering in Iceland as well as considering the possibility

of collaborating in offshore Norwegian oil exploration.24

More recently, Beijing has also increased its funding for Arctic

research, set up a polar institute in Shanghai, and in 2012 sent the

Chinese ice breaker Xue Long through the Northeast Passage above

22. Ed Struzik, “China signals hunger for Arctic’s mineral riches”, The Guardian,June 4, 2013 at http://www.theguardian.com/environment/2013/jun/04/china-arctics-mineral-riches

23. Kim Wall, “China seeks greater influence in Arctic region”, South China MorningPost, June 25, 2013 at http://www.scmp.com/news/china/article/1268160/china-seeks-greater-influence-arctic-region

24. Bree Feng, “China Looks North: Carving out a Role in the Arctic”, Asia PacificFoundation of Canada, April 30, 2015 at https://www.asiapacific.ca/canada-asia-agenda/china-looks-north-carving-out-role-arctic


Russia and Scandinavia, to examine the suitability of using that route

as a commercial waterway. It has also held several international

symposiums, and invited foreign scholars onboard Xue Long during

its polar voyages. In February, its third icebreaker, the Novorossiysk

completed its first Arctic voyage.25

India’s Interests

Even if India and China lack territorial contiguity with the polar region,

healthy bilateral relations with the Council’s permanent members and

participation in research programmes will go a long way in gaining

access to resources and transportation routes. But seasonal constraints,

difficulty in navigation, high insurance costs, and poor infrastructure

will impede the full economic potential of the NSR.

India’s stated position is that it will contribute its scientific

expertise, particularly the polar research capabilities, in advancing the

goals of the Arctic Council. But beyond that, New Delhi will look at

options to explore for hydrocarbons and diversify its energy basket.

Geographically, Russia is best suited for exploration tie-ups. Half of

the Arctic’s population is Russian. The area accounts for 11 percent of

Russia’s GDP and over 20 percent of its exports. But to curry favour

with Moscow, Delhi has to take a firm stand on the Russian contention

that the disputed Lomonosov and Mendeleev ridges are extensions of

its Siberian shelf. By toeing Moscow’s line, New Delhi could get access

to the rich mineral deposits and the NSR to ply trade. In a string of

bids, New Delhi has lost out to Beijing in the battle for Russian energy

resources. India got a major jolt when CNPC signed an agreement with

Novatek, Russia’s largest private gas producer, to acquire a 20 percent

stake in a LNG project in the Yamal Peninsula in the Russian Arctic.

Though India’s bilateral relations with the Nordic states are

witnessing a spurt in trade and investments, the volumes are way

behind that of China’s. India is yet to firm up a multi-pronged approach

as that of China to engage with the Nordic states, especially in the area

of strategic interests which will invariably become the cornerstone in

Indo-Nordic relations. While India has had a chequered past in the

25. Russia’s newest Novorossiysk icebreaker completes first Arctic voyage, Tass,February 11, 2017, http://tass.com/economy/930329


area of defence and security cooperation with Sweden, Indo-

Norwegian strategic ties had also suffered setbacks during the years

of the Liberation Tigers of Tamil Eelam (LTTE) insurgency. On the

economic front, Oslo has deplored Telenor’s investment failures in

India. Incidentally, India’s Finance Minister recently paid a visit to

Norway to iron out wrinkles in the bilateral relationship and further

consolidate New Delhi’s prospects in the Arctic. India is looking to

woo Norway’s $700 billion sovereign wealth fund, apart from bagging

stakes in the offshore oil fields dotting the Barents Sea, recently opened

up for development as per its New Exploration Licensing Policy.

Though security issues did come up for discussion during the Finnish

Foreign Minister’s recent visit to New Delhi, the details of those talks

remain under wraps. In Finland’s ‘Action Plan for India’, trade and

investment forms the core of Helsinki’s vision document. Nehru’s visit

to Copenhagen in 1957 laid the foundation of Indo-Danish relationship.

But ties between the two sides became frosty in July 2012 when India

scaled down diplomatic ties with Denmark after its refusal to extradite

Kim Davy, the main accused in the 1995 Purulia arms drop case. During

the Icelandic Foreign Minister ’s visit to New Delhi in 2011, his

counterpart S.M. Krishna broached the issue of Indian strategic

interests in the Arctic. But it remains unclear whether the Indian Prime

Minister picked up the threads from where S.M. Krishna left, in his

talks with Iceland’s President during his recent India visit.

According to the Multilateral Investment Guarantee Agency’s 2009

survey of leading BRICS (Brazil, Russia, India, China and South Africa)

“outward investors”, Indian investors have been found to be more

responsible and transparent than China in Africa, where several states

are perceived to be “undemocratic” with weak regulations and

lawlessness. According to the survey, Indian firms engage with local

stakeholders and are sensitive to local concerns. If India is seen as a

more trustworthy partner in Africa than China, then surely the Nordic

countries can expect the same from Indian businesses if crucial sectors

are opened up for Indian investments. Closer economic integration and

confidence-building will pave the way for India’s full membership in

the Arctic Council along with China.

India has maintained that its interests in the region are scientific,


unlike China and South Korea, which have been eager to dive into

commercial activity in the environmentally sensitive region. In 2013,

India scored a major diplomatic victory by managing to gain a seat on

the Arctic Council as a permanent observer, along with China, Italy,

Singapore, Japan and South Korea, which will give it the opportunity

to be a part of what transpires in the region.

New Delhi has had good long-term relations with many of the

Arctic Council members. However, with climate change being one of

the top concerns of the Arctic Council, it may come under increasing

pressure to do more on cutting emissions. Both India and China have

been at odds with the European Union’s environmental regulations

that ask developing countries to cut levels of greenhouse gases (GHG).

India’s refusal to participate in many global programmes to cut GHG

emissions over the past few years has seen it come under increasing

pressure from several countries, although India has maintained that

such demands are against its economic interests and will hurt its

growth prospects. Its stand on emissions may also impinge on its Arctic

interests. Now, following its inclusion as an observer in the Arctic

Council, India may find itself placed in an awkward position while

fulfilling its new role in the Arctic Council.

Regardless of its energy goals, India intends to be more active in

the Arctic Circle. Plans are being drawn to send many more people to

‘Himadri’, India’s research station in the Arctic, which was inaugurated

in 2008. The station is located in the Norwegian archipelago of Svalbard

at the International Arctic Research Base in Ny-Alesund. India has

already spent $3 million on developing Himadri and plans to spend

up to $15 million more on future development.26

India’s interests in the region have been set out as the following:

• For domestic energy needs,

• Continuing the tradition of polar research from its permanent

research station Himadri,

• Arctic shipping routes between Asia, America and Europe will

be 40 percent faster than those in the Indian, Pacific and Atlantic

Oceans,

26. Kabir Taneja, “India Arrives at the Arctic”, The New York Times, May 20, 2013 athttp://india.blogs.nytimes.com/2013/05/20/india-arrives-at-the-arctic/?_r=0


• India wants a stake in the Arctic Shelf, home to 10 to 30 percent

of the world’s undiscovered oil and gas reserves.

Former External Affairs Minister Salman Khurshid, who visited the

remote island of Ny Alesund with his Norwegian counterpart, Espen

Barth Eide, in 2013, announced that India is in the process of increasing

its presence in the Arctic and at Himadri. The Indian and Norwegian

delegations also examined other research facilities on the island that

has been turned into the world’s frontier post for research on the Arctic

and houses 180 scientists from more than 10 nations.27

For the time being, Indian scientists stay for just 40 days at a stretch

and the country’s station is only manned during the winters. But that

is set to change with New Delhi planning to spend close to $12 million

over the next five years to enhance its presence there.

“What happens here has a direct bearing on the Monsoon and

countries like India,” said Manish Tewari, one of the lead scientists

working at Himadri. “The Arctic is changing, ice melt is happening

faster than anyone had anticipated, and that means higher sea levels

across the world,” he added.

But it is not just science that is driving nations to the Arctic. As the

ice melt gathers speed, it is also exposing land which had earlier been

inaccessible. “There [are] potentially substantial reserves of coal and

oil trapped here and [have] sparked new global interest,” adds Prasad

Rao, lead scientist and PhD scholar at UNIS, the northernmost

university on the planet located on the independently-governed island

of Longyearbyen situated north of Ny Alesund.28

When asked if India was also planning to be part of the ‘New Great

Game’ as several think tanks are calling the increased interest over

potential energy resources in the Arctic, former foreign minister Salman

Khurshid had said that India was interested in working with other

nations in protecting the region.29

27. Team Norway Newsletter, at http://www.norwayemb.org.in/Global/SiteFolders/webdel/Newsletter%20June-Aug%2013.pdf

28. Sidharth Pandey, “India to expand engagement in the Arctic”, NDTV, June 13,2013 at http://www.ndtv.com/india-news/india-to-expand-engagement-in-the-arctic-525302

29. Ibid.


However, amongst Indian oil companies’ agreements with their

Russian counterparts include joint exploration for hydrocarbon

resources, including in the Arctic region, and during President Putin’s

visit to India in 2014, he stated that Russia was ready to export LNG

to India with the involvement of ONGC in Arctic projects.30 Hence,

while India’s stated objective in the region appears to be more about

scientific research, energy too may play a substantial role in its interest

in the region.

In a follow-up to Putin’s visit in 2014, India and Russia signed a

number of agreements during the meeting between President Putin

and Prime Minister Narendra Modi during the BRICS meeting in Goa

in October 2016. Both countries stated their intent to expand their

cooperation in Arctic energy along with other sectors. Around 20 deals

were struck, including enhanced cooperation in Russia’s Vankor oil

project. A consortium of Indian companies, headed by Oil India Ltd,

formalised a 23.9 percent acquisition of Vankorneft, the Rosneft-

controlled company managing the huge Vankor oil field, located in

Russia’s northern tundra, to the west of River Yenisey.31

A New Great Game?

The Arctic Council is no longer defining itself in geographic terms and

has factored in geo-economic elements. The economic rise of China

and India is bound to impact on the Arctic region, both through global

warming and their widening maritime footprint and interest in the

Arctic’s vast oil and gas resources.

The melting of the polar ice caps and the opening up of the yet

unexplored mineral-rich Arctic frontier to navigation and subsequent

exploration has compelled countries such as China and India to look

northwards, and to seek observer status in the Council. The quest,

however, has been far from smooth, as the Council is divided on

whether to open its doors to geographical outsiders. While the Nordic

countries were in favour of internationalising the Arctic, Russia and

30. Victor Prevost, “Arctic resources to boost Russia’s pivot to Asia”, The ArcticMonitor, February 4, 2015 at http://thearcticmonitor.org/tag/india/

31. Atle Staalesen, “A role for India in Russian Arctic”, The Independent BarentsObserver, October 18, 2016 at https://thebarentsobserver.com/en/arctic-industry-and-energy/2016/10/role-india-russian-arctic


Canada – which control more territory in the region – were opposed

to the move. Interestingly, the Obama Administration did not have a

clear stance, although according to some reports, the US was

instrumental in brokering a compromise on the decision over the

observer countries.32

China has aggressively made inroads into the region by

approaching individual countries. Iceland has emerged as a partner

of choice for China, whether through the ice-breaker Xue Long that

journeyed from Shanghai to Iceland via the Northern Sea Route along

the Russian coast (which cut the shipping time to northern Europe by

up to two weeks) or former Chinese premier Wen Jiabao signing Arctic

cooperation agreements with Iceland in 2012 and a free trade

agreement that was signed between the two a year later, in addition

to several commercial agreements with Denmark.33

Apart from the Arctic’s natural resources and India’s interest in

shaping policies that would impact on climate change and glacier

melting, the Arctic has a strategic relevance to India. China’s increasing

interest and presence in the Arctic would have implications for Indian

strategy. With the opening of the Northern Sea Route, which is referred

as the “Arctic Golden Waterway” in the Chinese media, China has an

alternate route to its “Malacca syndrome”, thereby negating India’s

strong presence and intervention capabilities in the Indian Ocean, as

the Northern Sea Route allows Beijing the possibility of accessing an

alternate route for its energy supplies.

A new ‘Great Game’ may be afoot in the Arctic, and India has now

secured a toehold. In an interesting essay on the topic, the convenor

of India’s National Security Advisory Board and former Indian foreign

secretary, Shyam Saran, argued that ‘developments in the Arctic Ocean

will redraw the geopolitical map of the world’. This, he argued, should

compel emerging countries such as India and China to put the Arctic

region on their international agenda. He also raised a pertinent

32. Steven Lee Myers, “Arctic Council Adds 6 Nations as Observer States, IncludingChina” New York Times, May 15, 2013, http://www.nytimes.com/2013/05/16/world/europe/arctic-council-adds-six-members-including-china.html

33. Arthur Guschin, “China, Iceland and the Arctic”, The Diplomat, May 20, 2015,http://thediplomat.com/2015/05/china-iceland-and-the-arctic/


question: ‘There is currently a shift in the centre of gravity of the global

economy from the trans-Atlantic to Asia-Pacific. Will there be a reversal

of this shift back to the trans-Atlantic via the Northern Tier?’34

This question may well define the future actions of both the

permanent members and the new observers of the Arctic Council.

While Syed Akbaruddin, the official spokesperson India’s Ministry of

External Affairs, issued a statement welcoming Arctic Council observer

status, ‘affirming our commitment to contribute our proven scientific

expertise, particularly in polar research capabilities, to the work of the

Arctic Council and to support its objectives’,35 India needs to capitalise

on the opportunity, and be an active participant in decisions not only

on global ecology, but on global political economy and the distribution

of political power.

While it is unlikely that the Arctic’s energy and mineral resources

will contribute to the global energy market till after 2025,36 it makes

economic sense to continue exploration for hydrocarbons in the Arctic,

particularly following the recent recovery in oil – and gas – prices in

the wake of the November 2016 OPEC deal. However, only those oil

companies that have staying power will be able to exploit the Arctic’s

rich energy potential as exploration and exploitation of oil and natural

gas in the region are daunting prospects. No doubt the region is covered

in sea ice much of the year, and the environment is tougher than most

other places where offshore production is concentrated. Moreover, it

requires specialised equipment, including drilling rigs that can

withstand rough seas and winds. The drilling season is much shorter

and operations are located far away from local ports and airfields,

making drilling more expensive. Despite the warming temperatures,

exploration and development in the Arctic would still be subject to

34. Shyam Saran, “Why the Arctic Ocean is important to India”, Business Standard,June 12, 2011 at http://www.business-standard.com/article/opinion/shyam-saran-why-the-arctic-ocean-is-important-to-india-111061200007_1.html

35. “India in Arctic Council with observer status”, Indian Express, May 16, 2013 athttp://archive.indianexpress.com/news/india-in-arctic-council-with-observer-status/1116294/

36. “Opportunities and Challenges for Arctic Oil and Gas Development”, EurasiaGroup Report for The Wilson Centre, Washington, D.C. January 2014 at http://www.wilsoncenter.org/sites/default/files/Artic%20Report_F2.pdf (accessedon May 22, 2014).


harsh conditions, especially in winter, which makes it costly and

challenging to develop infrastructure necessary to produce and

transport energy and mineral resources from newly discovered

deposits. More importantly, the price of oil – and gas – will be a key

factor, as producing in this environment requires the price of oil to be

around $100 a barrel to be remunerative.

8CHINA – THE MARKET DRIVER

China’s phenomenal growth over the last two decades has been driven

by a coal-based energy economy, which has not only taken a toll on

the environment and placed China at the top of the list of carbon

emitters, but has also opened China to international pressure on cutting

its emissions. Two months after he took over the presidency in April

2014, at a meeting of China’s top finance and economics body, Xi

Xinping called for a sweeping energy revolution in China, where

linking China’s energy security to the country’s economic prospects

and goals, he focused on five areas: demand, production, technology,

institutional governance, and global markets. Interestingly, although

he emphasised the need for environmental goals and the deployment

of cleaner energy in the country’s economic reform policy that had

already been stated at the Communist Party’s Third Plenum in

November 2013, he said that this would require a different approach

as the impact of China’s energy consumption and production patterns

would to a large extent shape international energy and commodity

markets. In fact, over the past decade, China’s energy consumption

has accounted for more than half of the global energy demand growth.

As a result, today, it holds the dubious distinction of being the largest

carbon emitter, producing a greater share of CO2 emissions than both

the EU and the US, with disastrous consequences on its own

environment.

Driven by the need to see and be seen as a responsible power, able

and willing to take on the mantle of global leadership, Xi Xinping


declared at the Asia-Pacific Economic Cooperation forum that his

country intended to achieve the peaking of CO2 emissions around 2030

and to undertake efforts to peak early. Moreover, in a document to the

UNFCC submitted to the UNFCCC ahead for the Paris talks in

November 2015 outlining its intended nationally determined

contributions and enhanced actions on climate change, China stated

that it would aim to cut its greenhouse gas (GHG) emissions per unit

of gross domestic product by 60-65 percent from 2005 levels by

increasing the share of non-fossil fuels in its primary energy

consumption to around 20 percent by 2030. The document, also

declared that although by 2014, it had achieved a cut of CO2 emissions

per unit of GDP by 33.8 percent from 2005 levels and had increased

the share of non-fossil fuels in primary energy consumption to 11.2

percent, it would, in keeping with its commitment to undertake

nationally determined actions by 2030, aim to lower carbon dioxide

emissions per unit of GDP by 60-65 percent from the 2005 level and

increase the share of non-fossil fuels in primary energy consumption

to around 20 percent.1

One of the strategies by which China plans to achieve its

commitments is to move away from a coal-dominated economy where

consumption accounts for around 66 percent of overall energy

consumption. The government announced in 2014 that it would cap

coal consumption by 2020 to 4.2 billion tonnes which would lead to coal

accounting for around 62 percent for the period under consideration.2

To fill the gap, it would increase the installed capacity of hydropower

to 300 GW (2.57 times more than that of 2005); on-grid wind power to

95.81 GW (90 times that of 2005 levels) and installed capacity of solar

power to 28.05 GW (400 times that of 2005) and an installed capacity

of nuclear power to 19.88 GW (2.9 times more since 2005).3

1. “Enhanced Actions on Climate Change: China’s intended nationally determinedcontributions”, Department of Climate Change, National development andReform Commission of China, June 30, 2015 at http://www4.unfccc.int/submissions/INDC/Published%20Documents/China/1/China’s%20INDC%20-%20on%2030%20June%202015.pdf

2. Jennifer Duggan, “China makes carbon pledge ahead of Paris climate changesummit” The Guardian, June 30, 2015 at http://www.theguardian.com/environment/2015/jun/30/china-carbon-emissions-2030-premier-li-keqiang-un-paris-climate-change-summit

3. See note 1.

China – The Market Driver 147

Interestingly, natural gas, which accounts for only 4 percent of the

country’s energy demand compared to more than 20 percent globally,

was not specified in the document. But as China’s economy continued

on its upward trajectory, and reports that it had outpaced the US in

energy consumption began coming in, there was a lot of optimism from

gas producers that with the growth in environmental pollution and

the government’s policy to cut coal consumption, the demand for

natural gas in China would grow, making a significant impact on the

gas market. The rationale for this optimism was that since 2010, China’s

gas consumption has doubled, from 92.5 billion cubic metres (bcm) to

185.5 bcm in 2014.4 Between 2000-2013, natural gas consumption in

China rose nearly seven times between 2000 and 2013 – from 25 bcm

per year to 168 bcm per year. Moreover, with China’s gas import

dependence reaching 32 percent in 2013, compared to just 2 percent in

2006, and China overtaking Iran to become the world’s third-largest

gas consumer after the US and Russia in 2012. Given that this accounted

for only 5.5 percent of overall energy use – among the lowest shares

in the world – it was expected that Chinese demand for gas would

soon outpace that of most other gas-consuming and importing

countries. These expectations were strengthened when in 2009, China

surpassed Japan to become the world’s third largest natural gas

consumer, despite its miniscule share in the country’s overall energy

basket. Millions of dollars were invested in LNG infrastructure as well

as in pipeline projects in gas-rich countries around the world, based

on expectations of increased purchases by China.5 In fact, China

National Petroleum Corporation (CNPC) predicted that Chinese gas

demand could possibly exceed 230 bcm per year by 2015, and could

even reach a figure of 400 bcm per annum by 2020. Finally, with gas

accounting for just 4-5 percent of the energy mix, the potential for

growth of natural gas is enormous.6

4. China’s natural gas demand sputters, Petroleum Economist, June 18, 2015 athttp://www.petroleum-economist.com/Article/3463739/Natural-Gas-and-LNG/Chinas-natural-gas-demand-sputters.html

5. Ibid., Petroleum Economist (June 2015).6. Michael Chen, “The Development of Chinese Gas Pricing: Drivers, Challenges

and Implications for Demand”, OIES Paper, NG 89, Oxford Institute for EnergyStudies, July 2014.


However, over the last 18 months beginning end 2015, the

slowdown in China’s economy has caused the demand for gas to come

down markedly, which casts doubts over the pace of future growth in

the country’s energy demand. Nonetheless, according to the

International Energy Agency’s (IEA) 2016 Medium Term Market

Report, China will drive the increase in global gas demand till 2021.

In a further attempt at encouraging the use of gas, the government

has cut price of gas twice in September and November 2015 to stimulate

demand and shift the consumption from coal. As a result, LNG imports

in 2016 increased by 33 percent as compared to the year before, higher

that the 30 percent forecast by some independent analysts and rose

even higher in early 2017, partly in tandem with the policy increase

gas usage to 10 percent of the energy mix by 2020, and partly as its

domestic production stagnated. According to some analysts, by the end

of the decade, China’s gas imports, both by sea and through pipelines,

may account for about 40 percent of the China’s gas use, up from

around a third in 2016.7 However, with China delaying the fourth phase

of its Central Asian Gas Pipeline, pipeline imports may be slowed

down as domestic production showed an increase. According to

forecasts from its National Energy Administration, China is aiming to

increase production, including from shale, to 170 bcm, up from 137

bcm in 2016.8

China’s Gas Procurement Strategy

Given its growing dependence on imports, China’s gas procurement

strategy is primarily based on three pillars, which are tuned to reduce

its concerns and vulnerability on growing dependence on international

markets and supply disruptions, including potential embargoes. Based

essentially on the principle of diversification, these include the

acquisition of overseas gas (and oil) blocks, including in countries that

had inimical relations with Western countries; building strategic ties

7. China’s Swapping Energy Independence for Cleaner Air”, Bloomberg, January11, 2017 at https://www.bloomberg.com/news/articles/2017-01-10/smog-choked-china-swapping-energy-independence-for-cleaner-air

8. China’s 2017 natural gas output to jump to 170 bcm - energy agency, ET EnergyWorld, February 17, 2017, http://energy.economictimes.indiatimes.com/news/oil-and-gas/chinas-2017-natural-gas-output-to-jump-to-170-bcm-energy-agency/57208375


with gas-rich countries and constructing pipelines from these sources,

such as Myanmar, Central Asian Republics and Russia, which would

not only lead to more integration with the Chinese market but would

also ensure that China was not dependent on shipping energy through

sea lanes that were dominated by rival powers. The energy component

of China’s ‘The Belt and Road’ (OBOR) initiative that was launched in

2013 by President Xi Jinping is also a recent initiative of this pillar,

which aims to transform China’s international energy policy by

strengthening energy cooperation with energy supplying countries

along the route in the long term; and developing its domestic gas

reserves – including shale gas reserves – to reduce its dependence on

imports.

Overseas Asset Acquisitions

China’s distrust of world markets it perceives as being dominated,

indeed controlled by Western powers through the international oil

companies, and the resultant price distortions, has given rise to a policy

wherein Beijing does not want to rely on the world energy market. At

the same time, China is also against placing its energy imports in

danger of being disrupted at sea through SLOCs that are controlled

by the US Navy and allied countries. Given that 80 percent of its trade

passes through the chokepoint of the Strait of Malacca, the concern,

however tenuous, is that in the event of a conflict over Taiwan would

render its energy imports vulnerable. As a result, China prefers to own

or gain control over its energy resources as much as possible. As a

result, China chose to acquire overseas oil and gas fields under what

is known as its “Going-Out” strategy, which was the brainchild of

former President Jiang Zemin, and at the time, ranked second among

the 10 strategies of Beijing’s “21st Century Oil Strategy”. Moreover,

apart from strategic issues, it also conformed with the commercial goals

of Chinese national oil companies (NOCs), namely, China National

Petroleum Corporation (CNPC), China National Offshore Oil

Corporation (CNOOC) and China Petroleum & Chemical Corporation,

more commonly known as Sinopec, as compared to domestic

production costs, many of its overseas acquisitions were more cost-

effective and allowed the companies to build up reserves at a cheaper

price. With the government’s active support, Chinese NOCs spread


out all over the world, buying oil and gas assets in Africa, Central Asia,

West Asia, Latin America and North America (Canada). Much of the

Chinese NOCs’ success was the result of the government’s assistance

and support which not only saw high level visits by Chinese political

leaders, but also access to loans to target governments in the form of

soft loans, as well as diplomatic support in the UN, military aid and

infrastructure projects.9

As a result, since the mid-1990s, Chinese NOCs have successfully

concluded a series of multi-billion dollar transactions which apart from

buying oil and gas blocks, also included takeovers of publicly-listed

companies, joint ventures with other IOCs for the development of deep

water blocks and unconventional shale plays in North America and

LNG liquefaction and export projects in Australia, North America and

Africa. However, by the end of 2012, while it was expected that the

acquisition policy will continue, there was a shift in strategy. Chinese

NOCs were now focusing more on efficiency and return on investments

as against the earlier strategy of acquiring volumes. Hence, the

companies were expected to become more selective and strategic in

the deals they chose to pursue in future.10

Pipeline Strategy

China’s main gas demand is in the coastal areas. Owing to advantages

in terms of transportation, pipeline gas is undoubtedly the first choice

for gas imports. Central Asian countries are the largest source of

pipeline gas imports for China. Turkmenistan alone supplied 46.48

percent of China’s gas imports in 2013. With completion of other

projects, Central Asian countries will supply even more gas to China.

Hence in 2002, the government began construction of the West-East

Gas Pipeline in 2002 which has three phases. The first phase was to

meet demand in the eastern and southern regions of the country with

production from its western provinces of Tarim, Qaidam, and Ordos,

9. Margaret Ng Wing-Chu, “University China’s overseas Oilfield AcquisitionStrategy and its Implications”, Reuters Fellowship Paper, Oxford, 2007 at https://reutersinstitute.politics.ox.ac.uk/sites/default/files/China’s%20 Overseas%20Oilfield%20Aquisition%20Strategy%20-%20And%20its%20Implications.pdf

10. David Blumental, “The changing nature of China’s global oil and gas deals”,China Economic Review, August 8, 2014 at http://www.chinaeconomicreview.com/china-global-oil-gas-mergers-acquisitions-strategic-partners


as well as from imports from the Central Asian countries and was

commissioned in 2004. The second tranche of the West-East trunk

pipeline was to connect with the Central Asian Gas Pipeline carrying

gas from Turkmenistan, Uzbekistan and Kazakhstan to the border in

western China and supplemented with supplies of CNG from Xinjiang

province. It was completed in 2011, connecting it to the key demand

centres in the south-eastern provinces. The third phase, which was to

supply gas to the western provinces, was launched in 2014 and was

also fed by imports from Central Asia. Proposals for the fourth and

fifth West-East Pipelines are still in the planning stages.

The majority of China’s Central Asian gas imports come from

Turkmenistan. According to Ashirguly Begliyev, Chairman of the state-

owned company, Turkmengaz, by 2030 Turkmenistan plans to increase

exports from 45 to 180 bcm per year, with China being the main

market.11

In 2010, an agreement was signed with Uzbekistan to deliver 350

bcf per year, and it has also signed an agreement with Kazakhstan for

the same. In fact, Kazakhstan plans to increase its supplies to China to

4.7 bcm per year once production of associated gas from its Kashagan

oil field is increased.12

In fact, pipeline imports exceeded LNG imports from 2012, with

Central Asian supplies forming a key factor in its larger regional

strategy of greater integration with Chinese markets, which in turn is

linked with Silk Road strategy of strengthening ties with Europe.

Recently, however, there are reports that China has delayed, or even

suspended the fourth phase – Line D – of the Central Asian Gas

Pipeline project, giving a blow to Uzbek and Kazakh export plans and

transit fees for Tajikistan and Kyrgyzstan. It may also have contributed

to Turkmenistan’s new found interest in pursuing the South Asian and

11. Alexander Shustov, “Why China will remain Turkmenistan’s main gas buyer”,Russia Beyond the Headlines (RBTH), January 26, 2017, http://rbth.com/business/2017/01/26/why-china-will-remain-turkmenistans-main-gas-buyer_689386http://rbth.com/business/2017/01/26/why-china-will-remain-turkmenistans-main-gas-buyer_689386

12. Kazakhs boost flows for own gas to China Natural Gas World, November 30,2016 http://www.naturalgasworld.com/kazakh-gas-to-flow-to-china-34676


European gas export projects, as prospects of increasing gas exports

to China even further are now in doubt.

However, although China may increase its Central Asian gas

imports in the future in line with its diversification of supplies strategy,

it is also importing gas from Myanmar, and has signed an agreement

with Russia. However, the China-Myanmar gas pipeline plays only a

supplementary role in China’s total natural gas import strategy. With

the pipeline which was started in 2010 commencing operations in 2013,

it was built with the purpose of serving mainly the south-western

Chinese provinces, and at its full capacity could transport 12 bcm of

gas from Myanmar’s offshore gas fields every year, accounting for

about 6 percent of China’s annual gas consumption. However, China

imported only 1.87 bcm through the pipeline in its first year of

operation. The 793 km pipeline links the Myanmar port of Kyaukpyu

with the Chinese city of Kunming in Yunan province. However,

opposition in Myanmar centring around the fact that the local

population will be deprived of these resources heading to China

through their territory, thereby depriving Myanmar of any gains from

this potentially valuable resources, has constricted the value and

potential of the pipelines. Recently, there were reports that the flow of

gas through one section of the pipeline in Yunan Province had to be

turned off after it started leaking, although what caused the leakage is

unclear.

At the end of June 2015, China began construction of the pipeline

which is slated to import 38 bcm of natural gas from Siberia from 2018

every year over 30 years. Called the “Power of Siberia”, the deal which

was signed in May 2014 between Russia’s state-owned energy giant

Gazprom and its Chinese counterpart CNPC after months of

negotiations, made headlines. Then, in November 2014, the two

countries signed another agreement, known as the Altai agreement,

which albeit non-binding, envisages supplying China with 30 bcm of

gas for 30 years, which could commence from 2020.13 (see Map 8.1)

13. Keun-Wook Paik, “Sino-Russian Gas and Oil Cooperation: Entering into a NewEra of Strategic Partnership?”, OIES Paper, WPM 59, Oxford Institute for EnergyStudies, April 2015 at http://www.oxfordenergy.org/wpcms/wp-content/uploads/2015/04/WPM-59.pdf

China – The Market Driver 153M

ap

8.1


The two agreements were seen as path-breaking for a variety of

reasons. First, the sheer cost of the $400 billion 400 km long project

was seen as path-breaking, not only for the price but also as one of the

biggest geo-strategic tools for both countries. The first deal, signed just

two months after Russia’s annexation of Crimea from Ukraine

provoked a confrontation with Europe and the US that culminated in

sanctions being imposed on Russia’s energy and financial industries,

it provided Moscow with the critical energy diversification strategy it

required to compensate for the expected reduction in its European gas

market and provided it with much needed finances. Secondly, if both

deals go through, it could remove the possibility of any sizeable LNG

supply to China and will establish Russia as a swing supplier between

Asia and Europe, protecting Russia from competition from other LNG

supplies to China. Third, it will to a large extent, put China’s coal-

reduction dilemma to rest by enhancing gas supplies; thereby ensuring

its energy security, while at the same time allowing it to circumvent

sea-based imports. At the same time, it also allowed Chinese companies

to renegotiate the price of gas from Turkmenistan to its advantage by

introducing another supply option.

LNG Imports

Since the first LNG terminal in Guangdong Province started operation

in 2006, China’s LNG imports have expanded to just under 20 million

tonnes a year, about 15 percent of China’s total annual gas consumption

in 2014.

From the early 2000s, China launched into a LNG expansion drive,

taking advantage of cheap supply deals of $3-4 per mm Btu with

Australia and Indonesia. Since then, China has built 12 LNG import

terminals, with 13 more terminals planned which, if successful, will

take China’s import capacity to 110 mt per year, with a total annual

receiving capacity of around 38.4 million tonnes. As a result, there has

been a steady expansion of LNG imports.

This is a far cry from China’s gas scenario in 2015. Due to the

slowdown in the economy, the expected switch to gas from coal had

not been as quick as anticipated, mainly because of low demand, a

result of lower industrial activity and power consumption. In fact, from

September 2015, China had raised the price of natural gas for non-


residential users by 20.5 percent, in order to stimulate domestic

exploration and production. Moreover, with coal prices at an all-time

low, some power stations and petrochemical factories had begun

reverting back to coal, despite the government’s policy of encouraging

cleaner fuels to cut pollution and emissions. As a result, although piped

gas imports remained robust, LNG shipments had slowed down.

With respect to LNG, the biggest factor in China’s loss of appetite

was the price at the time. Although China bought LNG from other

countries, Qatar was the largest source of LNG. As a result, in 2014,

LNG imports from Qatar in 2014 were down by nearly 5 percent from

a year ago, the first major contraction since 2006.14

LNG imports were also eroded by the pipeline deals signed with

the Central Asian Republics (CARs), particularly Turkmenistan, and

Russia. Moreover, with high domestic prices, China prefers to import

gas through pipeline deals as against the more expensive LNG, which

ranged between $3-4/mmBtu from low-end Pacific sources like

Australia and Indonesia and the high-end West Asian sources like

Qatar, priced between 9-12/mmBtu in 2014-15. Hence, Chinese pipeline

imports saw a rise of 41.3 percent in March 2015 from a year ago.15

Moreover, given that LNG contract pricing lags behind spot prices by

around six months, the lower LNG prices only began making a

difference from the second half of 2015. As a result, China’s expected

LNG expansion slowed down till early 2016, mainly due to the high

import costs. Moreover, the economic slowdown also had an impact

on demand as gas imports required a price that was acceptable to

customers. According to some analysts, however, the landmark deal

with Russia was expected to have a profound impact on the global

gas market with the potential to create a new price benchmark that

would put pricing pressures on other producers. The deal was

reportedly priced at around $12/mmBtu as against a price of $14-15/

mmBtu for Asia-Pacific imports LNG at the time the deal was signed

14. Colin Shek, “China’s gas-import slowdown threatens LNG producers”, AlJazeera, June 2, 2015 at http://www.aljazeera.com/indepth/features/2015/06/china-gas-import-slowdown-threatens-lng-producers-150602104833809.html

15. “China’s March natural gas pipeline imports rise 41.3% on year to 2.73 Bcm”,Platts, April 23, 2015 at http://www.platts.com/latest-news/natural-gas/singapore/chinas-march-natural-gas-pipeline-imports-rise-26072059


in 2014, close to what most of Europe paid under discounted long-

term contracts.16 Nonetheless Chinese gas imports will, to a large

extent, be contingent on domestic production, pricing as well as the

direction of China’s shale gas sector.

China’s Shale Gas Policy

Much of China’s recent scaling-down of natural gas imports has been

due to the government’s decision, in the face of the economic

slowdown, to focus on developing domestic resources of gas, including

its shale gas reserves. Following the success of the US shale resource

sector, China had initially begun looking closely at developing its vast

shale gas reserves. In 2012, the Ministry of Land and Resources said

China has estimated shale gas reserves of 134 tcm, of which 25 tcm

was recoverable. The US Energy Information Administration (EIA)

2013 on the other hand estimates however state that China’s technically

recoverable shale gas reserves total 1,211 tcf (34.3 tcm), double that of

the US, and the largest in the world,17 with the majority of the reserves

being concentrated in three basins, viz., Sichuan, Tarim and Yangtze

Platform, which together account for 89 percent of the estimated

national reserves. (see Map 8.2)

In 2012, the government announced a plan to produce 60-100 bcm

of shale gas by 2020 with the government taking on an active role in

promoting shale gas development, by providing an attractive fiscal

climate which included an upward revision of natural gas pricing and

pipeline transportation and opening up of the sector. However, by the

end of 2014, after two bidding rounds were held, the first in 2011, the

60-100 bcm target had been scaled down to half, that is, to 30 bcm.

Meanwhile, progress was slower than expected as many of the winners

of the bid lacked exploration experience. In fact, most of the shale gas

R&D activities in the first two rounds were carried out by Chinese

16. Carolyn Davis, “Russia-China Natural Gas Pipeline to Create New Global PriceBenchmark, Say Analysts”, Natural Gas Intel, May 23, 2014 at http://www.naturalgasintel.com/articles/98478-russia-china-natural-gas-pipeline-to-create-new-global-price-benchmark-say-analysts

17. Technically Recoverable Shale Oil and Shale Gas Resources: China, EnergyInformation Administration, US Department of Energy, September 2015, https://www.eia.gov/analysis/studies/worldshalegas/pdf/China_2013.pdf

China – The Market Driver 157M

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NOCs, like CNPC and Sinopec, as foreign companies were not allowed

to bid in the first two rounds, although they were encouraged to enter

into joint ventures with state-owned companies and share their

technology and services. Most of the companies, however, did not have

the requisite experience and knowledge with respect to shale E&P

technology, although China claims to have the requisite technology

for shale gas development. Several Chinese companies had even been

exporting their machinery to the US shale industry, despite the fact

that none of them have the full range of equipment required for such

activities.

Moreover, the blocks that were offered were generally considered

to be of poor quality and in difficult terrain, many of them being located

in mountainous rocky desert and buried deep underground, resulting

in extensive expenditure. Also, many of the country’s shale fields are

located in water-scarce areas, which makes the process more difficult.

Apart from upstream impediments to the development of shale gas

in China, downstream hurdles such as the lack of adequate pipeline

network impedes transportation and supply of resources.18

Despite these problems, China however came close to meeting the

revised target for shale gas production in 2014, producing 1.3 bcm,

compared with a goal of 1.5 bcm, although nearly 90 percent of it came

from a single field, the Fuling block in south-western Chongqing

municipality, being developed by Sinopec, with some 200 mcm being

produced from 40 wells drilled by CNPC.19 Recent reports have painted

an even brighter picture. In September 2016, CNPC signed a second

production sharing contract (PSC) with BP PLC for shale gas

exploration, development and production in the Sichuan basin, the first

having been signed in March 2016. BP’s 2016 Energy Outlook in fact

expects that by 2035, China will become the world’s largest contributor

to growth in shale gas production.20

18. Sophia Sun, “Shale Gas development in China”, Alberta, at http://www.albertacanada.com/china/documents/ShaleGasDevelopmentInChina.pdf

19. Wang Zhongmin, “China’s Elusive Shale Gas Boom”, Caixin Online, July 4, 2015at http://english.caixin.com/2015-04-06/100797698.html

20. “BP, CNPC sign second Chinese shale gas PSC”, Oil & Gas Journal, September1, 2016, http://www.ogj.com/articles/2016/09/bp-cnpc-sign-second-chinese-shale-gas-psc.html


Offshore Disputes

The South China Sea

Although a large part of its energy security policy is focused on

acquiring offshore assets, enhancing domestic production andpurchasing oil and gas, China is also seeking to expand its claim over

territory in its near abroad that is expected to be rich in energy

resources. This has, in turn seen it involved in numerous territorialdisputes in its neighbourhood with rival claimants. At the top of the

list is the South China Sea (SCS), which according to the US EIA, could

be holding around 11 billion barrels of oil and 190 tcf of natural gas.On the other hand, China’s state-owned company Chinese National

Offshore Oil Company puts the number at 125 billion barrels of oil

and 500 tcf in undiscovered resources.

At the same time, the SCS, being also bordered by Vietnam,

Philippines, Taiwan, Brunei, Malaysia and Indonesia, is also significant

to international shipping with a third of the global shipping passingthrough it each year, and more importantly, the Strait of Malacca and

the Lombok Strait located in these waters, through which 80 percent

of the total energy trade of the littoral states of China, Taiwan, Japanand South Korea traverses. Moreover, it possesses a large number of

islands having strategic, legal, political and financial worth for the

regional and international powers.

While the sea’s strategic location makes it invaluable for China,

the presence of the hydrocarbon and marine resources have intensified

the competition towards claiming sovereignty over these resources, toa point where localised tensions have often evolved into larger conflicts

between China on the one hand and one or more regional states, each

claiming rights over the sea and islands therein. China claims its righton almost the entire SCS region where its claims rest on the historical

nine-dash line, which include the Spratly Islands, Gulf of Tonkin,

Hainan Islands and the Paracel Islands, and has established bases witha wide array of advanced equipment on some of these islands. In the

recent past, the disputes have often been exacerbated by the presence

of the US in the region to strengthen its alliance partners.21

21. Hafsa Khalid, “Pivot to Asia: US Strategy to Contain China or to RebalanceAsia?”, The Washington Review of Turkish and Eurasian Affairs, February 2015 athttp://www.thewashingtonreview.org/articles/pivot-to-asia-us-strategy-to-contain-china-or-to-rebalance-asia.html


East China Sea

Similarly, China has also accelerated its search for natural resources in

the East China Sea in recent years, which, according to the EIA, holds

between 1-2 tcf of natural gas reserves, with the Japanese government

stating that it had installed 12 offshore platforms, mainly gas structures,

in the area since 2012, and accusing Beijing of abrogating the June 2008

agreement wherein the two countries had stated that they would

cooperate on the development of natural resources in the Sea. However,

China resumed exploration in the East China Sea in 2013 after the

Japanese government bought a disputed island chain from private

owners, angering Beijing, although China’s Foreign Ministry said its

drilling activities were in waters which are were not disputed and were

therefore legal.22

Strategising Supplies

While all the above strategies point to the intention of the government

to ensure access to sufficient gas supplies to facilitate the transition

from a coal-based economy to cleaner fuels, wherein gas plays an

important role, the policy however failed in ensuring a synergy

between the external strategies and domestic energy policy. As a result,

today, China may be facing a glut in gas supply due to lower-than-

expected demand. An important factor is China’s economic slowdown.

At the start of 2015, China’s economic growth slowed to its lowest at

7 percent in the first quarter, down from 7.3 percent in the last quarter

of 2014. More importantly, some key sectors displayed weakness,

setting off concerns that the economy could be losing momentum. One

indicator of this slowdown was that the output for electricity fell by

3.7 percent in March, the biggest since the 2008 financial crisis.23

But the main driver for the fall in gas demand is the National

Development and Reform Commission’s (NDRC) – the powerful

22. Philip Wen, “Japan finds China’s expansion in East China Sea ‘extremelyregrettable’”, Sunday Morning Herald, July 23, 2015 at http://www.smh.com.au/world/japan-finds-chinas-expansion-in-east-china-sea-extremely-regrettable-20150723-giiowk.html

23. Kevin Yao and KohGui Qing, “China growth slowest in six years, more stimulusexpected soon”, Reuters, April 15, 2015 at http://www.reuters.com/article/2015/04/15/us-china-economy-gdp-idUSKBN0N52E220150415


economic planning organisation – decision to increase gas prices to

bring them in line with international gas prices, in order to attract

investments in domestic gas development as well as to minimise losses

on gas imports by the national oil companies, and encourage them to

bring more gas into the country. However, the increased domestic price

of gas proved to be a deterrent for industry as well as the power

producers, who were already struggling due to a slowing economy

and falling demand for power in general.24

Nevertheless, despite the slowdown and possible reduction in

consumption of energy in some sectors, the outlook on gas is expected

to remain positive, given the low penetration of natural gas in the

economy, where even modest amounts of fuel switching to gas in the

power sector and the transport sector would be sufficient for significant

growth in consumption in the years ahead. Nonetheless, in order for

China to attain its goal of lowering carbon emissions and pollution,

which in turn would require access to more gas supplies, it would

require to implement relevant policy reforms, particularly in the area

of gas pricing. Currently, gas pricing in China is fragmented, with

imported LNG being indexed to oil, while imported pipeline gas is

subject to the government-prescribed price. This has led to distortions

between domestically-produced gas price and imported gas price. The

problem has been exacerbated as currently LNG imports far outweigh

domestic demand.

At the same time, if the reforms being planned do succeed, and

the demand for gas increases, supply may fall short of demand, despite

the fact that China has substantial conventional and unconventional

gas reserves. China will therefore have to fill the demand-supply gap

through imports, which may have economic consequences, particularly

at a time when the economy is showing signs of slowing. Hence, the

stability and economic efficiency, of natural gas supply are very

important in safeguarding China’s energy security, particularly in an

environment where the domestic price is lower than the purchase price.

To ensure “stability” wherein supply can meet the demand and

respond quickly to a sudden change in supply-demand balance, the

24. Justin Jacobs, “China’s natural gas demand sputters”, Petroleum Economist, July/August 2015, p. 23.


setting up of a natural gas trading hub would allow the establishment

of a gas price mechanism which would China’s leverage in pricing

power for natural gas imports in the gas market. While several Asian

countries are looking at setting up an Asian gas trading hub, several

Chinese analysts are advocating that it should be established in China.

How China deals with its energy issues will have an impact that

will resonate far beyond its borders. While China’s consumption of

energy may set off a competitive race with other large consuming

nations to secure supplies with, it is not only how much China

consumes which will affect geopolitics, but also the strategies it

employs to get its supplies. For example, China uses energy deals to

establish or strengthen strategic partnerships for larger geopolitical

goals, the recent deals with Russia and the Central Asian countries

being a case in point. At the same time, these deals have the potential

to have implications for the larger global gas market, and may change

the current LNG pricing mechanism. Moreover, with the US switching

its role from an energy importer to an exporter, it may have

implications for its strategic and military ties with energy exporting

countries, as they may now seek security in strengthening energy-based

strategic ties with China, the largest energy market.

Hence, while China’s rise is closely linked with its energy security,

the rest of the world’s energy security may well be determined by

China’s rise and the policies and strategies it employs to ensure its

energy security.

9INDIA – A LEGACY OF WASTED

OPPORTUNITIES

With a huge and growing population, low per capita consumption but

rapid industrialisation under the current government’s ‘Make in India’

initiative, India is being seen as the energy market with the most

promise. The International Energy Agency’s (IEA) 2011 World Energy

Outlook Report had in fact projected that India’s demand for gas would

increase incrementally by 6.5 percent per annum between 2008 and

2035.1 More recently, BP’s 2015 Statistical Review of World Energy Markets

showed this figure to grow at a rate of 7.1 percent, which was higher

than China’s, whose demand had fallen to a 2.6 percent rate of growth

in energy demand. At the same time, the government’s Intended

Nationally Determined Contribution Pledge of cutting carbon

emissions by 33 to 35 percent by 2030 from 2005 levels, presents it with

the dilemma to deliver sufficient clean energy at appropriate prices

for different social segments, from the very rich to the very poor.

Although Prime Minister Narendra Modi’s penchant for renewable

energy is well known – and considerable focus of the government’s

energy policy is on ramping up clean energy, notably solar, the latter

cannot deliver the volumes required to meet the escalating demand.

Many saw natural gas as a means to enhance India’s energy

1. “Are we entering a Golden Age of Gas”, World Energy Outlook, Special Report,International Energy Agency 2011 at http://www.worldenergyoutlook.org/media/weowebsite/2011/WEO2011_GoldenAgeofGasReport.pdf


security, particularly following the post-2014 price drop and increased

global supplies due to the US shale gas bonanza. In fact, the

government even announced that henceforth, India’s economy would

be gas-based, with the share of gas in its energy basket rising from the

current 6-7 percent to 15 percent by 2022, bringing hope and cheer to

the beleaguered global gas industry.2 The government also announced

plans to double its LNG import terminal capacity over the next six years

to 47.5 million tonnes from the current 21.3 m.t.

At the same time, the government is also a partner in the four-

nation project known as the TAPI project, which envisages bringing

gas from Turkmenistan; it is also in negotiations with several other

countries, including Russia, Iran, Oman and Myanmar for more piped

gas. Clearly therefore, natural gas is high on India’s energy agenda on

the grounds that it has the potential to replace coal and oil as a bridge

or transition fuel to the government’s goal of bringing about a

renewable energy revolution by 2050.

However, several challenges will have to be addressed, most of

which emanate from the ambiguities and lack of planning which

continue to plague the domestic gas sector.

Challenges for India’s Gas Sector

According to official estimates, India’s proven natural gas reserves are

around 1.4 trillion cubic metres (tcm), which comprises only 0.7 percent

of global gas reserves. Hence, India cannot be described as a ‘gas rich’

country. Nevertheless, with 17 percent, that is around 1.4 billion of the

world’s population, its potential as an important and growing player

on the international gas market has generated a lot of interest, given

that demand in the traditional gas markets is slowing down. Together

with China, demand for gas in these two countries is projected to grow

from 11 percent in 2012 to 24 percent in 2035. However, according to

estimates, India’s share of the total world gas demand will grow to

only 7 percent from the current 4 percent, as against China, which till

the recent economic slowdown was expected to grow to 18 percent

2. Nidhi Varmaand Douglas Busvine, “India to gradually move to gas-basedeconomy, Dharmendra Pradhan says”, Reuters, May 6, 2016 at http://in.reuters.com/article/india-energy-economy-idINKCN0XX0PQ

India – A Legacy of Wasted Opportunities 165

from the current 8 percent as a percentage of world demand. The

proportion of gas in India’s domestic primary energy consumption was

till recently expected to rise from 7 to 9 per cent, with coal and oil, at

44 percent and 25 percent respectively, remaining the preferred fuels,

by 2035.3

Several factors will have to be taken into consideration for the

modest projections for gas before gas can begin to compete with other

fuels and in fact to ensure the growth of the gas sector. A look at the

challenges that the gas sector is faced with is akin to a Catch-22

situation.

A Curious Pricing Regime

In the past, a major factor that has restricted the penetration of gas in

the economy has been the high price of imported gas. Gas pricing in

India follows a unique formula. Domestically produced gas price is

based on the weighted average price of four global benchmarks, viz.,

the US-based Henry Hub, Canada-based Alberta Gas, the UK-based

National Balancing Point or NBP, and Russian gas, and is based on

the benchmark prices in the previous year and comes into force after

a quarter’s lag for a period of six months. For example, the price that

would be applicable from April to September 2015, would be based

on benchmark prices from January to December 2014.4

In 2002, following the discovery of large reserves of gas in the

Krishna Godavari D-6 basin in India’s eastern offshore basin by

Reliance Industries Ltd (RIL), estimated at the time to hold around 10

tcf (0.283 tcm) of gas, raised expectations that it had the potential to

change India’s energy fortunes. Initially production, which commenced

in 2009, was around 60 mmscmd, but soon after began falling and

finally came down to less than 15 mmscmd. RIL attributed the fall on

the geological complexity of the acreage; on the other hand, the

government claimed that the company was not drilling enough wells,

3. Anupama Sen, “India’s ‘gas renaissance’ – Rhetoric versus Reality”, Forum, Issue99, Oxford Institute for Energy Studies, February 2015, p.25.

4. Anand Kalyanaraman, “All you wanted to know about: Gas Pricing Formula”,The Hindu Business Line, April 6, 2015 at http://www.thehindubusinessline.com/opinion/columns/all-you-wanted-to-know-about-gas-pricing-formula/article7074268.ece


and was waiting for the domestic price of gas to be increased, as RIL

had taken the lead in demanding for market-linked pricing for gas.

Prior to the discovery, between 1997 and 2005, various committees

had been appointed to work out an effective pricing mechanism for

gas, which saw prices being increased a few times, although well below

the cost of production. As a result. The state-owned companies and

the government had been taking on the burden of the subsidies. It was

only in May 2010 that the then UPA government decided to increase

prices from $1.7/mmBtu to $4.2/mmBtu. However, the price increase

was carried out only on the upstream side. Moreover, till 2013, gas

produced by state-owned companies was priced between $2.52-4.2/

mmBtu, while the price charged by privately-owned firms was

between $4.2-5.25/mmBtu.

This dual pricing mechanism also prevailed in the case of LNG

imports, which commenced in 2004 to meet growing shortfall in

domestic production. While LNG imports from Qatar were based on

long-term contracts, prices of imports from other suppliers like Oman,

Nigeria, Algeria, Australia, Trinidad and Tobago, Egypt, Malaysia, etc,

were based on the prevailing spot prices. Cargoes from Qatar, which

were linked to JCC crude oil prices under an agreed formula, were

fixed at $2.53/mmBtu till 2008, which translated to a re-gasified price

of $3.63/mmBtu ex-terminal, while those procured from the spot

market were far higher, that is, between the range of $-29/mmBtu.5

In order to encourage domestic production, the Rangarajan

Committee was set up to review gas pricing in the country. In its report

which was submitted in December 2012, the Committee recommended

that the price of domestically produced gas be raised to $8.4 mmBtu

as the existing price was not sufficiently remunerative to encourage

domestic production. Since India’s dependence on gas was expected

to rise over time, the rationale was that if prices were not competitive,

it would not incentivise investment in domestic production; on the

contrary it would lead to an increased dependence on imports.

5. Kamlesh Trivedi, “Indian Spot LNG Trade: How Indian Buyers Set New Ceilingfor Spot LNG Price in 2008 and Emerging Trends for 2009, The Energy Exchange,2008 at http://core.theenergyexchange.co.uk/agile_assets/725/TRIVEDI_GAS_MATTERS.pdf


However, imports continued to rise and in fact rose sharply to reach

15.2 bcm by 2011, as against 0.34 bcm in 2004. On the other hand,

production, which was at 27.9 bcm in 2000, and had risen to 52.2 bcm

in 2010-11, had fallen to 47.6 bcm in 2011-12. Hence, the revised price

would benefit producers across the board.6

Nevertheless, the recommendation came in for a lot of opposition

from the power and fertiliser sectors, which were the largest sectoral

consumers, as every dollar increase in the price would increase their

input costs by as much as Rs.3,000-4,000 crore a year for urea producers

and as much as Rs.10,000 crore on gas-based electricity generation

generating units, due to the highly subsidised rates at which they had

to sell their resources.7 It would also lead to an increase in the

government’s subsidy bill.

In June 2013, the government, accepting the Rangarajan

Committee’s recommendations, agreed to raise gas prices to $8.4/

mmBtu, effective April 1, 2014. However, the new prices never did

come into effect as the Election Commission deferred the notification

till the completion of 2014 Lok Sabha Elections. Since the UPA had lost

the elections, the new BJP-led NDA government decided that the whole

issue of gas pricing needed to be re-examined and directed that the

guidelines be kept in abeyance till 30 September, 2014, and that

domestically produced gas should continue to be priced at the

prevailing rate as on March 31, 2014,8 that is, at $4.2 per mmBtu. Then,

as global gas prices continued to fall, domestically produced gas prices

were once again cut by a further 18 percent in September 2016, to $2.50

per mmBtu for the period October to March 2017. The low prices

prevailing in the domestic market as well as subsidies in retail pricing

of gas-based fertilisers, led to international oil and gas companies either

exiting from the upstream or not bidding for exploration and

production (E&P) contracts under the NELP scheme.

While domestic gas prices were being cut, the price of the

6. C.P. Chandrasekhar, “Cost of reliance on gas”, Frontline, July 12, 2013 at http://www.frontline.in/columns/C_P_Chandrasekhar/cost-of-reliance-on-gas/article4840199.ece

7. Ibid.8. Report on Committee on Gas Pricing- 2014 at http://petroleum.nic.in/docs/

committee_report_on_gas_pricing_2014.pdf


contracted deliveries of LNG into India continued to rule, drawing a

much higher price than those in the spot market. But although

weakening crude oil prices from the second half of 2014 was reflected

in the crude-indexed term contracts by end-2014, the long-term contract

with Qatar, which was linked to the JCC pricing mechanism over a

12-month period, continued to increase into December. As a result, with

a dependency on LNG of 25 percent of demand – which has

subsequently risen to 45 percent in 2016-17 – not only did India’s LNG

import bill balloon to $10 billion in 2014, buyers were faced with the

challenge of passing on the costs to downstream buyers. This led to

buyers either turning to the spot market, or opting for cheaper fuels

like naphtha and coal over gas for power generation. Happily however,

with the fall in prices from 2014, India began to acquire more LNG

from the spot market. Also its successful price revision negotiations

with Qatar saw its overall LNG import bill come down from $7.5 billion

in 2012-13 to $6.7 billion in 2015-16.9

Low Production

One of the mantras of the political class in India is the need to strive

for greater energy independence, based on the ballooning energy

imports bill year-on-year. Ironically, while not ranked as an “energy-

rich” nation, the Directorate General of Hydrocarbons (DGH),

nevertheless states that much of India’s demand for energy, particularly

natural gas, can be met from domestic resources. According to the

DGH, the country’s conventional hydrocarbon resources are of the

order of 28.1 billion tonnes of oil and oil equivalent (toe) gas, of which,

as of March 2014 only 10,947 mtoegas could be established through

exploration, of which only 4,098 million toe can be developed. Even

then, over the past few years, production has grown marginally, if at

all, and the DGH states that approximately 17 billion tonnes or 61

percent of the resources fall under the “yet to find category”, and that

out of the total sedimentary basins containing oil and gas, only 48

percent have been appraised. With 4 percent of the sedimentary basin

9. Sanjay Kumar Kar, “How bullish is the outlook for oil and gas industry in2017?”, ET Energy World, January 2, 2017 at http://energy.economictimes.indiatimes.com/news/oil-and-gas/how-bullish-is-the-outlook-for-oil-gas-industry-in-2017/56295012


declared a “no-go area”, that is, areas where exploration activities

cannot be carried out due to regulations/directives and restrictions,

that leaves only 48 percent yet to be appraised or evaluated for

hydrocarbon prospectivity through geological studies, geophysical

surveys and exploratory drilling.10 Much of this is in deep offshore and

difficult geological formations, requiring sophisticated and expensive

technology, which the domestic state-owned companies lack. With

most of India’s residual gas reserves available in deep offshore basins,

the lack of access to sophisticated technology is one of the factors that

has led to a fall in domestic output. Moreover, the prevailing low price

for gas that is produced for domestic fields has prevented foreign oil

companies with the requisite technology from entering the Indian E&P

sector.

In order to resolve this problem, the government revised the New

Exploration Licensing Policy (NELP) which had been launched in 1997,

to attract the requisite investment and technology to increase domestic

production of hydrocarbons. After nine rounds of NELP, the production

of both oil and gas had continued to stagnate, leading to greater

recourse to imports. A major failing of NELP was the unattractive terms

offered, which deterred the international oil companies with the

requisite experience and technology required for exploring difficult

acreages. Another deterrent was the requirement for separate contracts

for overlapping resources, which resulted in a long-winded exploration

and development process. Moreover, interested investors were not

allowed to select the hydrocarbon blocks and had to accept acreages

the government offered. There were also complaints that accurate data

over the capacity of the fields was not made available to the investors.

As a result, after nine rounds spanning 15 years, although NELP

succeeded in awarding 252 blocks for exploration of oil and gas and

signed production sharing contracts (PSCs), only 100 have been

surveyed while several of the blocks are under arbitration. Hence,

while investments of around $22 billion have been made, production

has not improved as expected.

10. “Hydrocarbon Exploration and Production Activities”, Directorate General ofHydrocarbons, Ministry of Petroleum and Natural Gas, Government of India,2013-14 at http://www.dghindia.org/pdf/2013-14.pdf


To resolve the problem, the government introduced major policy

reforms in the upstream sector, and several more are reported to be

under consideration. In October 2015, the Discovered Small Field

(Marginal) Field Policy was introduced – which was subsequently

rechristened as the Discovered Small Field Policy – to reduce the

growing import dependency of oil and gas and to monetise several

discoveries in the ‘marginal’ fields, which was assessed to be around

85 million tonnes of oil and oil equivalent gas reserves. The highlights

of the policy included revenue-sharing contracts which required

minimum regulatory burden for field monetisation; Single Licence for

Conventional and Non-conventional hydrocarbons, including CBM,

shale gas/oil, tight gas, gas hydrates and other resources to be

identified in future; no restrictions on exploration activity during the

contract period; up to 100 percent participation by foreign companies,

along with joint ventures; crude oil and gas pricing and sale, where

the contractor would be free to sell the crude and natural gas

exclusively in the domestic market through a transparent bidding

process; removal of cess on crude oil production, although the royalty

rates would continue as under the NELP regime; customs duty

exemptions for specified goods and services for contract areas.11

Moreover, the Hydrocarbon Exploration Licensing Policy or HELP

was introduced on March 10, 2016, wherein an open acreage policy

was introduced with the option to select the exploration blocks being

provided without waiting for the formal bid round; revenue-sharing

model with no cost recovery and operational freedom given to the

operator; pricing and marketing freedom; single license for exploration

and production of conventional as well as non-conventional

hydrocarbon resources; an increase of one year in the exploration phase

to eight years for onshore areas, and ten years from the earlier eight

years for offshore areas, as well as reduced royalty rates for offshore

blocks.

The Policy for Extension of Production-Sharing Contracts was

introduced on March 10, 2016 as well, to enable oil companies to

11. “National Data Repository”, Directorate General of Hydrocarbons, Ministry ofPetroleum and Natural Gas, Government of India, February 10, 2017 at https://www.ndrdgh.gov.in/NDR/?page_id=2243


recover the balance reserves for a period of 10 years from 28 pre-NELP

small and marginal fields after the expiry of the contract. However,

the government would have to bear a higher amount than during the

original contract period as well as a 10 percent higher percentage of

the profit.

These reforms are expected to be ready by the end of the first

quarter of 2017, after which companies will be allowed to bid under

the new formulae. While the government is hopeful that this will

enhance production in domestic acreages and attract more foreign and

domestic companies which had hitherto shied away, there are several

other challenges that need to be addressed before anomalies in the oil

and gas sector can be removed. Once the bidding is opened, the success

of the new policies will be tested.

Equity Assets

Apart from increasing output from domestic fields, India is also

increasing its overseas equity acquisitions of oil and natural gas. While

the initial focus was on oil assets, currently, India is also focusing on

acquiring natural gas assets as well. However, in the past, India had

more often than not lost out to Chinese companies, as Indian oil

companies did not have the kind of financial heft or the government’s

backing as did their Chinese competitors. Therefore, in order to provide

more leverage to Indian companies, the government has recently

proposed to create a large oil company by integrating a number of

public sector oil companies, including Indian Oil Corporation, Oil and

Natural Gas Corporation, Hindustan Petroleum Corporation and

others, that together would have not only the financial ability but also

the economies of scale and higher risk-taking ability, to rival global

oil majors as well as domestic private sector oil and gas companies

when bidding for overseas energy assets. If successful, India may create

more such integrated firms in other areas of the hydrocarbon sector.

The combined market cap of India’s key oil and gas companies such

as ONGC, IOC, OIL, HPCL and BPCL Ltd., is around $106 billion,

which is less than the top oil companies such as Exxon Mobil

Corporation, Royal Dutch Shell Plc or Chevron, but would give India

an advantage over smaller companies including Russia’s Rosneft,


which has a market cap of around $70 billion or the UK’s BP Plc., which

has a market cap of $115.57 billion.

Although this has been welcomed by industry, there is some

scepticism regarding the plan given that a similar move had been

planned in 2005, but had failed to take off. Other challenges involved

in such integration plans, including on the human resources side, have

to be dealt with before such a venture can be successfully

implemented.12

In the meantime, however, India has been on an asset acquisition

spree. ONGC Videsh Ltd (OVL), the overseas arm of its state-owned

parent company, Oil and Natural Gas Corporation), won the rights to

bid for oil and gas development in its Farzad-B gas field, which OVL

had discovered in 2008. Now it hopes to compete with several other

IOCs and Asian firms for rights to develop the field. The field is

believed to have in-place gas reserves of 21.7 trillion cubic feet in-place

gas reserves of 21.7 tcf, of which 12.5 tcf are recoverable, in 2008.13

In July 2014, OVL also acquired a stake in Mozambique’s offshore

Rovuma Area 1, which holds as much as 75 tcf of gas reserves, and in

September 2015, it acquired its third asset in Russia, when it took a 15

.percent stake in Vankor, Russia’s second biggest oil field in East Siberia,

from Rosneft. It is estimated that Vankor holds 173 bcm of gas apart

from 476 million tonnes of oil and condensates.14

Poor Domestic Gas Infrastructure

Apart from the existing four terminals, located at Dahej and Hazira in

Gujarat, Dabhol in Maharashtra and Kochi in Kerala, which were

constructed to receive LNG mainly from Qatar, three new terminals

12. “Union Budget 2017: An integrated oil giant proposed to take on global rivals”,Firstpost, February 10, 2017 at http://www.firstpost.com/business/union-budget-2017-an-integrated-oil-giant-proposed-to-take-on-global-rivals-3243252.html

13. “ONGC Videsh qualifies to bid for Iran oil, gas projects”, Business Standard,January 2, 2017 at http://www.business-standard.com/article/companies/ongc-videsh-qualifies-to-bid-for-iran-oil-gas-projects-117010300607_1.html

14. “ONGC Videsh raises $1 bn in bonds to fund Vankor acquisition”, BusinessStandard, December 18, 2016 at http://www.business-standard.com/article/companies/ongc-videsh-raises-1-bn-in-bonds-to-fund-vankor-acquisition-116121800311_1.html


with a capacity of 5 million tonnes capacity each are being planned or

are under construction in Ennore in Tamil Nadu, Dhamra in Odisha

and Kakinada in Andhra Pradesh, to rectify the earlier policy of

constructing terminals in the west coast only.15 (see Map 9.1)

The problem, however, is with the lack of connectivity between

the terminals and consumer centres. A case in point is the recently

constructed LNG import terminal in Kochi which is lying unutilised

as the pipeline that was to connect the terminal to consumption centres

has yet to be built. The current gas pipeline network at 16,250 km16 is

inadequate, with pipeline density in India being among the lowest in

the world with the onshore natural gas pipeline density being only

3 km per 1,000 sq. km, as compared to 50 sq. km in the US, China and

the UK. (see Map 9.2)

Realising the need to enhance the network, the state oil companies

were awarded contracts to build and operate more infrastructure as

natural gas transmission pipeline projects are very capital-intensive,

and given the prevailing subsidies, there has been very limited private

sector participation in the sector, which has also led to stunted growth.

In 2014, the government announced a plan to double the network

to 30,000 km in the next few years with 11,000 km of new pipelines

being authorised to be constructed over the next three to five years.

However, according to the state oil companies contracted to build the

additional network, the projects were unviable as the existing gas

transmission network in the country was under-utilised due to paucity

of gas. In 2014-15, against a demand of 405 mmscmd, availability was

123.25 mmscmd, which included production from domestic fields, as

well as coal bed methane and imported, re-gasified LNG.17 Part of this

gap was due to the lack of re-gasification terminals or a limited surplus

re-gasification capacity as key end-user industries, such as

15. Sanjeev Choudhary, “Government weighs doubling capacity of LNG terminalcapacity”, The Economic Times, June 7, 2016 at http://economictimes.indiatimes.com/industry/energy/oil-gas/government-weighs-doubling-capacity-of-lng-import-terminal/articleshow/52628254.cms

16. Gas Pipeline Network, Petroleum Planning & Analysis Cell, March 31, 2016 athttp://ppac.org.in/content/154_1_PipelineandCGDStructure.aspx

17. Annual Report 2015-16, Ministry of Petroleum and Natural Gas, Governmentof India at http://www.petroleum.nic.in/docs/Annual_Report/AR15-16.pdf


ap

9.1

India – A Legacy of Wasted Opportunities 175M

ap

9.2


manufacturers of urea for the fertiliser sector and power sector, found

it hard to afford re-gasified LNG. Therefore, constructing more

terminals will be contingent on the availability of additional gas

supplies, the demand for imported gas (re-gasified LNG) versus

alternate fuels, and time-bound clearances.

Transnational Pipeline(s) Woes

With all the problems facing the domestic upstream, as mentioned

above, the government has to import large volumes to meet the

demand-supply gap. Since LNG requires expensive infrastructure and

is not competitive with domestically produced gas, a decision was

taken that gas could be imported through pipelines from neighbouring

gas-rich countries. However, as of now, not a single project has been

implemented.

From the late 1980s, India began negotiations with Iran on

importing gas through a pipeline project, better known as the Iran-

Pakistan-India (IPI) pipeline project that was expected to bring 38

mmcmd of gas to India via Pakistan. Soon after, India also began

negotiations with Myanmar and Bangladesh on another pipeline

project that would entail bringing Myanmarese gas to India via

Bangladesh. Again, in the mid-2000s, yet another project, which sought

to bring gas from Turkmenistan to India, via Afghanistan and Pakistan,

under the $10 billion TAPI project, was placed on the table. However,

while the former two projects have all but been written off, the

government seems more optimistic about the TAPI project, despite the

fact that problems continue to plague the project. Although the

question of assured supplies of gas have more or less been resolved

with supplies to be sourced from the Galkynysh field– the second

largest in the world after the South Pars field in the Persian Gulf, with

reserves of 16 tcf of gas – and construction has commenced following

the selection of Turkmengaz as consortium leader, albeit after

considerable delay due to Ashgabat’s refusal to grant equity to foreign

companies.

Nevertheless, several challenges have to be overcome before the

project sees the light of day, despite a timeline of 2018 being set for

completion of the pipeline. First, the route through which the 1800 km


long pipeline, carrying 3.2 bcf of natural gas per annum from

Turkmenistan to India, will transit Herat and Kandahar in Afghanistan,

before entering Pakistan, where it will reach Multan via Quetta before

ending at Fazilka, is hardly deemed secure, making the project a

security risk due to the ongoing conflict in these regions.

Moreover, the financing of the project – estimated at around $10

billion – has yet to be sorted out. Although the Turkmen President,

Gurbanguly Berdimukhamedov, signed a decree in early June 2016 on

the allocation of more than $45 million, i.e., 85 percent of the cost of

construction, to finance the initial stage of the pipeline to the Afghan

border, and the ADB has stated that it would consider providing

financial support, there have been reports that the Islamic Development

Bank (IDB), the Saudi Fund for Development, the Japanese government

and the European Development Bank have also expressed interest in

financing the project. However, given the complexity of the project and

the security challenges involved, it is unlikely that financiers will take

a risk without adequate insurance cover. Interestingly, one of the factors

that contributed to the demise of the IPI project was the lack of

insurance cover for the project.

The fall in gas prices from 2014 has been a setback. It may not only

affect Turkmenistan’s ability to pay its share of the construction at a

time when the Turkmen economy is facing a major financial crunch

due to the fall in gas prices, but also because the recipient countries

may no longer be willing to pay the price demanded by Ashgabat.

Earlier, India had agreed to pay a little over $9/mmBtu as well as $3/

mmBtu for transportation charges.18 However, with the current spot

price for Asian LNG now expected to increase following the rise in oil

prices, India may need to leverage its market power to negotiate lower

prices.

Finally, with Iran now back in business following the lifting of the

sanctions, the TAPI project may not get the same kind of backing from

the US as it did previously. According to recent reports, China has

expressed its opposition to the project as it conflicts with its plans for

its CPEC (China-Pakistan Economic Corridor) project. That

18. “Japan May spot LNG prices fall to lowest in more than 2 years”, Reuters, June8, 2016 at http://in.reuters.com/article/lng-japan-spot-idINL4N1911PO


Turkmenistan is well aware of this fact is one of the reasons why it is

pushing for the construction, as any delay may further delay the project

or even put it on hold.

Ashgabat’s concerns are not unfounded. For instance, India is

negotiating with Iran for reviving either the sub-sea pipeline project

supplied with gas from Iran’s Farzad B gasfield, or alternatively,

liquefying the gas and shipping it to India, either directly or through

Oman. There have also been reports that Russia and India are exploring

the possibility of constructing transnational pipelines which will bring

oil and gas to India, through the restive Chinese province of Xinjiang,19

as well as other options to bring Russian gas to India, via swap deals

with China and Myanmar20 or as LNG through the recently resurrected

Chahbahar Port initiative.

Furthermore, there are also reports of a renewed interest to

construct the 900-km pipeline from Myanmar, through Bangladesh to

India (MBI) carrying 5 bcm per annum of gas from the Shwe gas field

in southern Myanmar.21 The pipeline was first proposed in the late

1990s, and following investments by Indian oil companies in

Myanmar’s offshore gas fields in the early 2000s, an agreement was

arrived at between the respective countries in 2005 to construct the

pipeline which at a cost of $ 1 billion, was to deliver 5 bcm per annum

of gas to India. However, after Bangladesh made some preconditions

on transit rights that India found unacceptable there was a breakdown

in the negotiations, following which India proposed to go ahead with

the negotiations on a bilateral basis with Myanmar, bypassing Dhaka.

The new proposal envisaged bringing the pipeline through India’s

northeast region, but at an enhanced price. Protracted negotiations and

a failure on the part of India to commit to the project saw Myanmar

19. Utpal Bhaskar, “India in talks with Russia, Iran on transnational pipelines”,Mint, June 5, 2015 at http://www.livemint.com/Industry/lTBSa05Fk3Wlyrj9c6pthP/India-in-talks-with-Russia-Iran-on-transnational-pipelines.html

20. Raheja Vanya, “ONGC exploring swap deals to import gas from Myanmar”,Times of India, December 7, 2016 at timesofindia.indiatimes.com/business/india-business/ONGC-exploring-swap-deals-to-import-gas-from-Myanmar/articleshow/55849335.cms

21. “Official talks on Myanmar-India-Bangla pipeline to start soon”, The IndianExpress, July 3, 2015 at http://indianexpress.com/article/business/business-others/official-talks-on-myanmar-india-bangla-pipeline-to-start-soon/


entering into negotiations with China regarding another bilateral

pipeline project, which was successfully completed in 2013. As the gas

that was proposed to be committed to India was ceded to China, the

project was written off at the time. However, after the Awami League

formed the government in 2009, relations with India improved

substantially and the both sides have now agreed to revive negotiations

for a trilateral pipeline.

While the several pipeline projects that have been on the table for

decades are still ongoing, the crash in gas prices may, in fact, have put

them on the backburner. With spot prices of LNG now becoming

affordable, with further drops more than likely over the next few years,

India seems to prefer pursuing the LNG option rather than opting for

pipelines, given the geopolitical and strategic complications involved.

What however, is evident is that the Indian gas scenario has now

changed. The issue of Qatar’s acceptance of a downward revision of

prices for its long-term contract with India is a case in point. Moreover,

with India emerging as a potentially major gas market, and given the

supply glut in the LNG market, the advantage now appears to be in

India’s favour. However, whether India can gain from the current state

of the gas market will depend on a number of factors.

Unconventional Gas

Apart from its policy on enhancing production from its conventional

hydrocarbon reserves, India is also looking at exploring and developing

its unconventional, including shale gas, gas hydrates and coal bed

methane (CBM) resources.

With regard to shale gas, various agencies, including Schlumberger,

US EIA, United States Geological Survey (USGS) and domestic

companies, have estimated the shale gas and oil resource potential in

selected sedimentary basins/sub-basins in India could range from 300

tcf (8.5 tcm) to 2,100 tcf (59.5 tcm). Recently, the government said that

as per the notification of the former government‘s policy guidelines

of October 14, 2013, for exploration and exploitation of shale gas, the

national oil companies had been awarded blocks under the nomination

regimes in three phases, for a three-year duration. Under Phase I,

permission has been granted for 55 blocks to ONGC and OIL in Assam,

Arunachal Pradesh, Gujarat, Rajasthan, Andhra Pradesh and Tamil


Nadu. Under Phase-II, the same two companies have to identify an

additional 75 and 5 blocks, respectively. And in Phase III, they would

have to identify 50 and 5 blocks to carry out shale gas exploration and

exploitation.22 However, despite the policy initiative, several challenges

will have to be overcome before India can begin exploiting its shale in

a comprehensive manner. The biggest challenge would be that of land

acquisition and the relocation of displaced people. Moreover,

production costs are higher in India as the rocks are found deeper in

the ground, thereby necessitating additional technical development to

bring down costs. Another area of concern is that of water, of which

large amounts are needed and often in areas where it is scarce. Huge

and perhaps often over-estimated figures are being cited; according to

Chesapeake Energy, 65,000-600,000 gallons of water are required to drill

one well. In India’s water-scarce regions, this is a major disincentive.23

Moreover, India is also looking at developing its substantial CBM

and gas hydrates potential. According to the DGH, the CBM resources

in the country are to the tune of 92 tcf (2.6 tcm), while its gas hydrate

resources are estimated at 1894 tcm in and around the western, eastern

and Andaman offshore areas. The Petroleum and Natural Gas Ministry

formulated the National Gas Hydrate Programme (NGHP) in 2000, and

the first expedition was launched in 2006, which had established the

presence of gas hydrates in the Krishna, Godavari and Mahanadi

basins as well as in the deep waters off the Andamans. The next two

phases of the NGHP are currently in an advanced stage of planning

and are due in the period 2014-2017. 24 India is cooperating with other

countries, including the US’ Department of Energy and Japan, in

exploration and development, besides data collection, analysis and

identification of sites for pilot production testing.

22. “Identification of Extractable Reserves of Shale Gas”, Press Information Bureau,Government of India Ministry of Petroleum & Natural Gas, May 13, 2015 athttp://pib.nic.in/newsite/PrintRelease.aspx?relid=121651

23. Shailaja Nair, “Shale gas to rock the Indian energy scene? Some say yes, but...”,The Barrel, November 10, 2010, at www.platts.com/weblog/oilblog/2010/11/10/shale_gas_to_ro.html, (accessed on July 17, 2011).

24. “India and US to join hands for gas hydrates”, Business Standard, September26, 2014 at http://www.business-standard.com/content/b2b-manufacturing-industry/india-and-us-to-join-hands-for-gas-hydrates-114092600811_1.html


However, while development of gas hydrates is still not

commercially viable, the potential for CBM has been assured.

Nevertheless, till date only 33 CBM blocks have been awarded with

only one block being under commercial production, while 16 reserves

have been relinquished by the owners, sources said. In order to give a

fillip to the production of CBM, the current government is planning

to amend the existing CBM Policy of 2009 to incentivise investment in

the sector. Some of the issues that will be addressed are resolving the

overlapping of CBM and coal blocks by putting in place a more

workable mechanism to end the conflict of interest between the

Petroleum and Coal Ministries, simplifying and liberalising the existing

CBM contracts.25

India is also looking at accelerating its policy on acquisition of

overseas oil and gas assets. With the recent fall in crude oil prices, the

opportunity for acquiring such assets abroad has improved, and the

government is planning to increase its forays in more countries with

an increased energy diplomacy agenda and an enhanced kitty.

Currently, India has 35 projects in 16 countries from Brazil to New

Zealand which it has acquired through the overseas arm of its largest

state-owned oil firm, ONGC.

Can the Inconsistencies be Overcome?

The Indian gas market is relatively young, with the first discovery in

the country having been made only in the 1970s. Today, gas accounts

for only 6 percent of the country’s energy mix, compared with coal

(40 percent) and oil (22 percent), hydro (2 percent), nuclear (1 percent),

renewable energy (1 percent) and biomass (26 percent). However,

according to the IEA New Policies Scenario 2014, the share of gas in

India’s energy mix is expected to grow over the next few decades,

although projections of gas replacing coal in the power sector is

unlikely to take place as gas-based generation is considered

uncompetitive with respect to coal-based generation. On the other

hand, with the government’s stated goal of reducing oil consumption

25. Animesh Singh, “Amendments in Coal Bed Methane Policy in works toencourage output”, The Pioneer, March 4, 2015 at http://www.dailypioneer.com/business/amendments-in-coal-bed-methane-policy-in-works-to-encourage-output.html


incrementally over the next few years, the expectation is that natural

gas, being a more environmentally acceptable fuel than oil in the

transport sector, as well as in the residential sector, may be used as a

substitute.

With the International Monetary Fund (IMF) projecting India’s

growth to grow from 7.2 percent in 201426 to 7.5 percent in 2015 – which

has subsequently been downgraded to around 6.7 percent due to the

recent demonetisation drive – India certainly has the potential to

leverage its growing demand for energy market in the larger global

geopolitical and strategic arena, akin to China. Although a latecomer

in the game of energy politics, India is finally leveraging its strengths

as a growing energy market, indeed, one of the few consumers whose

appetite for energy has not diminished despite the dismal global

economic scenario.

In the LNG world, India is being watched with interest due to its

potential as a LNG market, despite its current comparatively low

consumption for gas. In 2015-16, India imported 16 million tonnes of

LNG, but some forecasters predict it will import nearly 50 million

tonnes by 2030. In a further attempt at increasing gas use in the fertiliser

and power sectors and to encourage mid-stream infrastructure creation,

from LNG terminals to pipelines and city gas distribution networks,

the government has halved the basic customs duty on LNG imports

from 5 percent to 2.5 percent.27

At a time when the gas market is over-supplied and several new

LNG projects are expected to come on line, including in Australia, new

US export terminals, and Africa, India is seen as a bright spot in an

otherwise dark scenario, at least for the next couple of years. However,

with the rise in crude prices, and demand expected to increase from

other Asian and European markets as countries are attempting to make

26. “Country and Regional Perspectives, World Economic Outlook: UnevenGrowth—short- and long-term Factors, Chapter 2, International Monetary Fund,(IMF), April 2015 at http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/c2.pdf

27. “Arun Jaitley halves import duty on LNG to 2.5 per cent”, The Economic Times,February 2, 2017 at http://energy.economictimes.indiatimes.com/news/oil-and-gas/budget-2017-arun-jaitley-halves-import-duty-on-lng-to-2-5-per-cent/56926865


the transition from oil and coal to cleaner fuels, including natural gas,

the window of opportunity for India may not remain open for very

long. While India’s potential as a huge gas market is not in question,

the inconsistencies in its policies, and the lack of related infrastructure

raise doubts whether India will be able to get its act together in time

to benefit from the prevailing low gas price regime or whether it will

have lost a golden opportunity to position itself as a country that has

what it takes to call the shots in the global energy market.

10WHAT LIES AHEAD FOR GAS

IN THE FUTURE?

From a fuel that was used in regionally disconnected markets, natural

gas was projected to take over as the fuel of choice for many consuming

nations across the world. Its versatility and the fact that its carbon

emissions are lower than either coal or oil, makes it well placed to be

the ‘bridge’ or transition fuel between fossil fuels and renewables.

Between 1990 and 2010, the share of gas witnessed a rise in demand,

particularly in the emerging markets of the Asia-Pacific region,

including China, and the West Asian countries, partly due to increasing

environmental concerns as well as abundant supplies. In fact, natural

gas succeeded in increasing its market share by 60 percent during this

period. But although the International Energy Agency (IEA) remains

optimistic over the future of gas, the dilemma for gas producers and

exporters is two-fold: how to make gas more competitive and thereby

increase its share in national energy baskets as against coal; and second,

to increase its share in the transport sector vis-à-vis the current leader

oil and future electric vehicles (EVs).

The IEA, in its 2016 Medium-Term Gas Market Report, paints a

more sombre canvas for the gas market, stating that while oil markets

will start rebalancing from 2017, an oversupply in natural gas will

continue until the end of the decade, causing prices to remain

What Lies Ahead for Gas in the Future? 185

depressed. Multiple factors have been cited for the forecast, including

cheap coal, plummeting renewable energy costs in key gas markets

like Japan and South Korea on the one hand, and lower economic

growth and environmental concerns in China, besides the price factor.

So, does this mean that the prospects for the gas market are set to

be gloomy for the foreseeable future? According to the BP Energy

Outlook 2035, published in 2015, despite the current gloomy outlook

for gas, demand for gas worldwide is projected to increase by 1.9

percent annually till 2035.1 But perhaps the most important factor that

will determine the future of gas is whether in the face of the growing

concerns regarding climate change, gas will be able to compete with

‘greener’ energy resources. However, the transportation cost of gas is

higher than the other fossil fuels, be they over land or sea. While the

cost of laying pipelines over long distances, along with transit fees and

construction of compressors adds to the expend, in the case of LNG,

the liquefaction, regasification and compression costs and

transportation in special vessels makes the delivered cost of gas much

higher than either coal or oil, thereby acting as a deterrent, particularly

for the cost-sensitive developing countries. In Asia, which is projected

to generate the majority of the growth in demand for energy resources

in general, and where the fall in gas prices had, in fact, been the most

dramatic, natural gas remains less competitive compared to cheap coal

and policy support for renewables.2 But even in Europe, gas

consumption was the lowest in 2014 since 1995, partly because of the

slow pace of recovery following the 2008 financial crisis, and partly

due to energy efficiency and the move towards renewables. As a result,

according to the IEA’s 2016 medium-term gas market report, since 2012

the demand for gas globally has increased by just 1 percent per annum,

as compared to the 10-year average of 2.2 percent, and from 2015 to

2021, demand will pick up marginally, increasing at an average annual

rate of 1.5 percent.

No doubt, the fall in prices from 2014 did revive interest in gas in

1. BP World Energy Outlook 2035, February 2015 at http://www.bp.com/content/dam/bp/pdf/Energy-economics/energy-outlook-2015/Energy_Outlook_2035_booklet.pdf

2. Medium-Term Gas Market Report 2016, International Energy Agency at https://www.iea.org/Textbase/npsum/MTGMR2016SUM.pdf


some countries. A case in point is India, where the government

announced that India would be moving to a gas-based economy;

several other countries in South and West Asia too are looking at an

incremental increase in their gas consumption. At the same time, the

abundance of supplies in the US from shale reserves has seen gas

replace both coal and nuclear plants. And as US imports of gas came

down, it freed up cargoes originally meant for the US, for other

markets. Around the same time, a number of new producers also began

entering the market, including Australia and Papua New Guinea from

the Asia-Pacific region, and Trinidad and Tobago and Nigeria in Africa,

while traditional producers and exporters like Qatar, Norway, Brunei,

Russia, Indonesia, Equatorial Guinea and Malaysia increased their

output. The combination of these two factors therefore rendered the

market to be over-supplied, causing prices to drop further.

Furthermore, an economic slow-down in China saw the demand

for energy consumption falling, albeit marginally, but nonetheless

dealing a blow to producers who were looking to the growing Chinese

market to absorb much more of the new supplies. According to the

energy regulator, the National Development and Reform Commission,

(NDRC), China’s total natural gas consumption rose by around

1 percent to 6.6 percent in 2016 up from 5.7 percent in 2015.3

But it was in Europe, the largest market for gas, that demand did

not pick up as expected. The 2008 financial-led economic crisis, from

which the developed world has still to emerge, caused demand to fall

considerably, began raising the share of renewable energy in their

energy basket in order to meet their carbon emissions cut commitments.

Geopolitics Versus Price

A large part of the reason for the lack of growth in gas in Europe is

due to its policy to reduce its dependence on Russia, its main supplier.

Russia’s proclivity to undermine rival supplies to its most important

market by disrupting gas supplies transiting recalcitrant states in the

3. Jennifer Li, “China Gas to benefit as coal to gas switch brings on millions ofnew users in northern areas”, South China Morning Post, February 14, 2017 athttp://www.scmp.com/business/companies/article/2070796/china-gas-benefit-coal-gas-switch-brings-millions-new-users


past (Ukraine, Belarus) or fomenting conflicts in states (Georgia) to

prevent alternative lines bypassing Russia from being constructed, has

been a growing area of concern. The recent conflict between Russia

and Ukraine has in fact brought a renewed urgency for many of the

EU states to wean themselves from their dependence on Russia for

energy, particularly gas, supplies. Furthermore, with Russia’s recent

announcement that it would stop using pipelines transiting Ukraine

after 2019, the European states are now faced with seeking alternative

transport networks to bring gas from Russia or construct the missing

links connecting newly proposed pipelines – the Turkish Stream and

the recently announced expansion of the Nord Stream link. In the likely

event that these alternative pipelines are not constructed, due to a

number of factors including regional tensions and huge capital costs

in a low price environment, Europe may find itself being left with few

alternatives to Russian gas.

The US too is encouraging the EU states to look at alternative

sources for its gas, both for weaning Europe away from dependence

on Russia as well as a future market for its own exports, which it plans

to commence soon. According to reports, the US company Cheniere

Energy, plans to supply eastern European countries with LNG in a few

years, including a floating regasification terminal off the coast of

Croatia, which would allow American companies to enter the central

and eastern European market,4 thereby further loosening Russia’s hold

over Europe’s gas market. Meanwhile, following the launch of its

energy security strategy in 2014, the European Commission has been

trying to ensure energy security for its member-states by exploring

carious sourcing options including from the Caspian Sea states, West

Asia – including post-sanctions Iran – and North Africa.

Aware of the need to broaden its market beyond Europe,

particularly after the Ukraine crisis,5 Moscow, since 2014, has been

looking eastward, towards Asia and particularly China. Both countries

4. Charles Kennedy, “North-American LNG Could Weaken Russia’s Grip OnEurope”, Oilprice.com, July 29, 2015 at http://oilprice.com/Energy/Natural-Gas/North-American-LNG-Could-Weaken-Russias-Grip-On-Europe.html

5. “Energy Perspectives: Long-term macro and market outlook”, Statoil, June 2015,p. 34 at http://www.statoil.com/en/NewsAndMedia/News/EnergyPerspectives/Downloads/Energy%20Perspectives%202015.pdf


have signed mega deals for gas in 2014 and 2015. At the same time,

wary of too much reliance on the Chinese market, and cognizant that

Beijing is also contracting large volumes of gas from the Central Asian

states, Moscow is also negotiating with India, as well as other South

Asian countries like Pakistan, for supplying gas, both via pipelines as

well as LNG.6 While negotiations are on with Pakistan to construct a

$2 billion pipeline called the North-South pipeline – the first major

Russian investment in Pakistan after decades – which on completion

is expected to pump imported LNG from Karachi, and possibly

Gwadar, to Lahore,7 it is also exploring various pipeline route options

for bringing gas to India, including through the Central Asian states

or Iran and even China, as well LNG through swap deals with

Myanmar.8

One of the emerging rivals of Russia for its eastern as well as

potentially European markets is Turkmenistan. Currently, however,

Ashgabat, which was completely dependent on Russia for export

routes, and turned to China as a diversification strategy, finds itself

becoming increasingly dependent on the Chinese market. As a result,

Ashgabat too is looking further a field, but its options are limited due

to the lack of export outlets. Despite the interest shown by the EU states

in Turkmen gas, the Southern Gas Corridor project has been held up

due to differences amongst the potential partners over pipeline capacity

and the legal disputes over sovereignty between the Caspian Basin

states.

Apart from Europe, which remains an attractive market due to the

price factor, the future growth of the gas market is expected to be in

Asia. While Japan and South Korea have been the main LNG

consumers, the outlook for further growth in Japan is not bright. With

6. “India eyeing LNG imports from Russia”, LNG World, June 8, 2015 at https://www.lngworldnews.com/india-eyeing-lng-imports-from-russia/

7. Zafar Bhutta, “$2b North-South pipeline: Pakistan asks Russia to further cutLNG supply fee”, The Express Tribune, February 11, 2017 at https://tribune.com.pk/story/1322815/2b-north-south-pipeline-pakistan-asks-russia-cut-lng-supply-fee/

8. “India, Russia to study building $25 billion pipeline”, The Economic Times,October 16, 2016 at http://economictimes.indiatimes.com/industry/energy/oil-gas/india-russia-to-study-building-25-billion-pipeline/articleshow/54878729.cms


nuclear energy poised to make a comeback, Japan may see its LNG

import decline continuing in 2017. According to the Institute of Energy

Economics (IEEJ) if around 14 nuclear plants restart by the end of 2017,

Japan’s LNG imports in 2017 could drop by more than 5 percent from

2016 levels.9

In 2014, the Asia-Pacific region consumed around 650 bcm of gas,

a fifth of the world total, and by 2014, demand in the non-OECD Asia-

Pacific region is expected to grow at a rate of 3.5 percent, that is around

1,300 bcm or around 28 percent of the world total.10 In South Asia too,

the sensitivity of the countries to energy prices is a key factor in

demand as displayed by the differences between the partners over gas

pricing – as well as security issues – which has seen the TAPI gas

pipeline project languishing for decades. Currently, with the price of

gas ruling at historically low levels, an over-supplied LNG market, and

post-sanctions Iran back in the game providing more supply options,

some of the signatories of the project, viz., Pakistan and India, are

looking at re-negotiating the pricing terms for Turkmen gas, as well

as long-term contractual obligations. At the same time, the longer the

negotiations drag on, the potential for cost-escalation of the project

increases, making it unviable.

In fact, the issue of LNG pricing will play a major role in the future

of the gas market, in general, and in the Asia-Pacific region, in

particular. Asian countries, especially the Asian OECD nations, have

been paying a premium for gas supplies due to oil-linked pricing,

which is much higher than hub-indexed prices, and long-term take-

or-pay contracts with no flexibility to resell the gas, due to the

destination clause, low demand flexibility and the lack of a regional

spot pricing mechanism. Much of the current new supply coming into

the market was due to the expectation of high and growing Asian

demand, particularly from China.

9. Aoshima Momoko et.al., “Economic and Energy Outlook of Japan throughFY2017”, Institute of Energy Economics, Japan, December 22, 2016 at https://eneken.ieej.or.jp/en/press/press161226.pdf

10. “Energy Perspectives: Long-term macro and market outlook”, Statoil, June 2015,p.34 at http://www.statoil.com/en/NewsAndMedia/News/EnergyPerspectives/Downloads/Energy%20Perspectives%202015.pdf


However, the recent successful re-negotiation by India’s largest

LNG importer Petronet of its long-term contract with Qatar’s RasGas,

whereby it not only paid less than half the contracted price but also

got a waiver for the penalty for importing less gas than was agreed in

the contract, may have changed the market irrevocably, as other Asian

countries, including China and Japan, too began negotiating for better

terms with suppliers.11 Japanese utilities, in fact, are not only

renegotiating contracts, but also questioning issues such as oil-indexed

pricing mechanisms and the destination clause that prevent the

reselling of surplus cargoes. Tokyo has also indicated its interest in

establishing Japan as an LNG trading hub in order to gain more

influence over the LNG market.12

Changing Market Dynamics

The influx of extra supplies triggered by the earlier phase of high prices

and the shale revolution had made the outlook for gas prices even more

bearish than for oil. As a result, Asian consumers who were paying

the highest prices for LNG are now not only planning to re-negotiate

their long-term contracts, but are also looking at setting up a spot-price

benchmark for Asian LNG.

With regard to long-term LNG contracts as well as those in the

planning stage, there are several options for both producers and

consumers, including retaining oil-indexed mechanisms with price

ceilings, hub-indexed pricing, and the inclusion of a future Asian spot

price in the contract, if and when it is introduced. Although oil-indexed

gas prices do not reflect developments in gas markets as there is

decreasing competition between oil and gas at the end-user level –

notably in the power sector – many producers are more comfortable

11. Siddhartha P. Saikia, “Post-crash in gas prices, India‘s Petronet to rework pricingfor LNG from Exxon’s Gorgon project in Australia”, Financial Express, May 31,2016 at http://www.financialexpress.com/economy/petronet-starts-talks-to-redo-pricing-for-gorgon-lng-deal/269570/;James Paton and AnnaShiryaevskaya, “China Joins India Seeking Better LNG Contracts for Buyers”,Bloomberg, March 11, 2016 at http://www.bloomberg.com/news/articles/2016-03-11/china-joins-india-seeking-better-lng-terms-as-contracts-weaken

12. Mayumi Negishi, “Japan steps on gas in bid to reshape LNG market”, The WallStreet Journal, June 19, 2016 at http://www.wsj.com/articles/japan-steps-on-gas-in-bid-to-reshape-lng-market-1466325065


with oil-indexed prices as several development costs of gas are linked

to oil prices. Moreover, they cite the lack of liquidity, limited curve,

fears of manipulation and concerns about volatility, for continuing with

oil-indexation. Finally, oil-indexation allows flexibility in pricing. For

example, when spot gas is cheaper than oil-indexed contract prices,

the buyer can reduce the offtake on volumes and go for cheaper hub

or spot supplies (or vice-versa), as was seen recently in India’s case.13

But at the end of the day, a major reason for producers’ preference for

the long-term oil-indexed pricing mechanism is that they provide them

with the security required for the huge investment needed in upstream

production infrastructure and associated transport networks.14

Nevertheless, at a time when spot gas prices are ruling, and

expected to remain low for some time, large consumers of gas are

unwilling to pay higher oil-indexed prices. In fact, the outlook for gas

prices has become even more pessimistic than that for oil, with some

analysts predicting that with global LNG supply poised to increase

by about a third over the next three years, it will push over-capacity

to around 10 percent, causing prices in Asia to plunge further. As a

result, the countries which had signed long-term oil-indexed contracts

when crude prices were higher and had suffered the most, are now

negotiating for revised terms.

But in all this turbulence, the outline of a truly global gas market

is emerging, led by the expansion of the LNG trade. Following the fall

in US gas prices due to the shale revolution, and the move towards a

more flexible form of pricing in Europe incorporating both hub and

oil-indexed mechanisms, Asian LNG, which was almost entirely oil-

indexed and priced much higher than in the other two markets, became

an attractive market. For example, following the increase in shale gas

production, US gas was prices below $2/mmBtu, while the price of

13. Anne-Sophie Corbeau, Anne Braaksma, Farid Hussin, Yayoi Yagoto and TakuroYamamoto, “The Asian Quest for LNG in a Globalising Market”, InternationalEnergy Agency, 2014 at https://www.iea.org/publications/freepublications/publication/PartnerCountrySeriesTheAsianQuestforLNGinaGlobalisingMarket.pdf

14. Gazprom, “oil-link vs spot gas prices, and storage, the Barrel”, April 23, 2015at http://blogs.platts.com/2015/04/23/gazprom-gas-oil-link-spot-prices-storage/


delivered gas in Asia was going for $15/mmBtu or more. Moreover,

Japan, the world’s largest LNG importer, accounts for approximately

34 percent of the LNG market. Combined with South Korea which

accounts for a little over 13 percent, it accounts for a little under 50

percent of the market, while Asia as a whole accounts for around 75

percent.15

However, with the drop in the price of oil, the delivered price of

spot LNG to Asia has come down from $18.3/mmBtu in April 2014

to less than $7/mmBtu in March 2016, thereby narrowing the window

of profitable opportunity. Currently, US exports to Asia (Japan) can be

delivered between a low of $5.60/mmBtu to $5.89/mmBtuand a high

of $6.97 and $8.24, including transportation costs, depending on

whether it is shipped via Panama or around South Africa,

respectively.16 The opportunity for US LNG exports to Asia are bright,

provided more production does not enter the market and drag prices

down further. However, if a global market dominated by spot prices

does take shape, the US can position itself as a swing producer, akin

to Saudia Arabia’s position in the oil market, and will allow it the space

to assert itself.

Moving Towards a More Integrated Gas Market

Although demand for gas has come down in some East Asian countries

like Japan, and South Korea, overall, the Asian countries are expected

to be the drivers for the growth in demand for gas, including LNG. As

mentioned earlier, while India has announced that it will increase the

use of gas in its overall energy consumption, China’s demand for gas

too will continue to grow, albeit at a slower pace. Some of the traditional

gas exporting countries like Malaysia and Indonesia are expected to

become net LNG importers, while the use of gas in several West Asian

countries is poised to multiply. Moreover, the number of importers

grew in 2015 including Jordan, Pakistan, Poland and Egypt.17

15. International Gas Union, 2016 World LNG Report, at http://www.igu.org/publications/2016-world-lng-report

16. Ronald D. Ripple, “U.S. Natural Gas (LNG) Exports: Opportunities andChallenges”, IAEE Energy Forum, Third Quarter, 2016 at https://www.iaee.org/en/Publications/newsletterdl.aspx?id=341

17. International Gas Union, World Gas LNG Report 2016 Edition, see note 15.


However, neither the older or more recent consumers are ready,

nor willing, to pay the high premiums paid by Asian consumers, as

compared with their European and North American counterparts, and

are seeking cheaper supplies and exploring alternatives to their

traditional contracts and price structures. Some companies are pushing

for, and succeeding in getting more flexibility in their contracts,

particularly with regard to destination clauses, with some major Asian

consumer governments negotiating with producer governments to

explore alternatives to oil-linked pricing and destination clauses. The

case of India’s Petronet’s deal with RasGas and re-selling gas acquired

from the US are some concrete examples.

Although long-term contracts indexed to crude oil prices are still

the main pricing mechanism adopted by Asian consumers, more and

more gas (LNG) is being bought on the spot market as well as one-

term transactions under short-term contracts.

Several Asian countries like Japan, China, and Singapore, are also

trying to develop regional trading hubs with the goal of increasing

price formation transparency. With an end goal to creating a global

LNG market, Japan is planning a strategy for setting up a new

procurement model whereby diverse players will make short-term,

spot purchases or more resilient contracts for LNG supplies, although

the conventional procurement model of long-term contracts will

continue for the time being. The EU too published a strategy for LNG

and gas storage in February 2016, and is trying to get international

cooperation toward further utilisation of LNG and establish an

integrated LNG market.18

In the meantime, various countries have accelerated initiatives to

create LNG trading hubs. In 2014, Japan opened an over-the-counter

(OTC) trading system for LNG, with the aim of developing an LNG

trading hub, while Singapore’s Stock Exchange launched the Singapore

SGX LNG Index Group or SLInG in June 2015, which will provide free-

on-board (FOB) prices for cargoes from Singapore to different

destinations, reflecting regional spot prices. So far, thirteen market

18. “Strategy for LNG Market Development: Creating flexible LNG Market andDeveloping an LNG Trading Hub in Japan”, Ministry of Economy, Trade andIndustry, Government of Japan, May 2, 2016 at http://www.meti.go.jp/english/press/2016/pdf/0502_01b.pdf


players have signed up to participate in the Index Group, and ten more

were expected to join. China too launched the Shanghai Oil and Gas

Exchange, which will trade in both pipeline gas and LNG, in July 2015.

However, all three exchanges have to overcome challenges before

they can emerge as certified trading hubs. While Japan lacks pipeline

connectivity with other Asian markets, and low liquidity and price

transparency, high levels of government regulation deter China as an

attractive option as a regional benchmark. In the case of Singapore,

trading volumes have been too moderate to establish a hub on the lines

of its North American or European counterparts.19

Although a beginning has been made and may see the

establishment of an Asian gas trading hub, a fully globalised gas

market is still elusive in the absence of a global gas price. According

to the IEA, certain factors are crucial for the development of trading

hubs – gas price liberalization, particularly the inability to pass through

gas purchase costs to customers, non-interference of governments, and

third-party access to gas infrastructure. Most Asian markets still lack

these factors barring Singapore. Moreover, the Asian gas markets are

not as mature as their counterparts in North America and Europe were

when these hubs were created. Most Asian countries depend mostly

on LNG imports, barring China, which imports both piped gas as well

as LNG, while Europe and North America rely mainly on domestic

production and pipeline imports. Some of the countries – Japan and

China – have initiated some changes, such as liberalisation of Japan’s

wholesale gas market which is expected to be completed by April 2017

and unbundling of pipeline transportation and storage infrastructure

in China of the three major national companies, as well as price

reforms. However, India and South Korea are yet to initiate the

requisite reforms on pricing or liberalisation of their gas markets. In

the case of Singapore, while it appears to be the strongest candidate

for a regional gas hub, it is a relatively small market and may become

a pricing hub for small-scale LNG trade in Southeast Asia at best.

Therefore, in the near future, instead of an Asian gas hub emerging,

more flexible pricing mechanisms may be expected to emerge in Asia,

19. “Natural Gas Prices in Asia, Natural Gas”, International Energy Outlook 2016,Chapter 3, Energy Information Administration, US Department of Energy, May11, 2016, at http://www.eia.gov/forecasts/ieo/nat_gas.cfm


with a mix of oil indexation, hub prices, and spot indices being used

by various countries,20 along with cancellation of destination clauses.

Already, spot and short-term LNG contracts of less than four years

have increased from 5.4 percent in 2000 to 29 percent in 2014. Also,

over the next decade, large amounts of LNG contracts will expire,allowing buyers to negotiate better terms in forthcoming deals,

including short-term contracts and/or reduced volumes, or simply pick

up supplies from the spot market. With over 120 million tonnes a yearof new supplies being contracted from 2015, the advantage is now with

the buyers.21 But for how long?

Under the current and near-term low price scenario, LNGproducers and exporters have not much option but to offer better terms

– and prices – to buyers in order to retain their market share. With

huge investments involved, they have little option. However, in thecase of planned, but yet to be implemented projects, it is likely that

many will be deferred. According to some analysts, the number of

delayed projects has increased from 40 to 63 from 2014. While initiallythe more complex and costlier projects like oil sands, LNG and deep-

water projects were the main casualties, as the oil price continued to

slide through 2015, the oil companies began deferring the smaller,simpler projects, while smaller producers too began deferring projects

from 2015.22 Some of these included Petronas’ Kasawari offshore gas

development project in Malaysia’s Sarawak province, Woodside’sCossack North offshore project in Australia, Royal Dutch Shell’s

proposed LNG project in Kitimat, Canada and Chevron-PTTEP’s Ubon

offshore project in Thailand, while GAIL India sought to defer a 20-year contract to buy LNG from Gazprom, as the latter has deferred its

Arctic Shtokman project.23

20. Anne-Sophie Corbeau & David Ledesma, “LNG Markets in Transition: TheGreat Reconfiguration”, King Abdullah Petroleum Studies and Research Center,April 2016, pp. 8-9 at https://www.kapsarc.org/wp-content/uploads/2016/05/LNG-Markets-in-Transition_A-Corbeau-and-D-Ledesma.pdf

21. Ibid., pp. 6 and 11.22. “Report finds nearly $230 billion in oil and gas projects deferred”, Offshore

Magazine, January 29, 2016 at http://www.offshore-mag.com/articles/2016/01/report-finds-nearly-230-billion-in-oil-and-gas-projects-deferred.html

23. Debjit Chakraborty and Rajesh Kumar Singh, “India’s Top Gas utility Seeks toDefer Gazprom’s LNG Contract”, Bloomberg, July 25, 2016 at http://www.bloomberg.com/news/articles/2016-07-25/india-s-top-gas-utility-seeks-to-defer-gazprom-lng-contract


Some producers are nevertheless ready to ride out the (price) storm.

Qatar, the largest LNG exporter, while not planning any major

investments, has been diversifying its market worldwide, covering

both the European and Asian markets and offering revised terms to

its long-term clients. Unlike its competitors, Doha has a major

advantage, as not only is its production cost one of the lowest in the

world, it has also acquired its own fleet of LNG vessels, including the

huge Q-Flex and Q-Max ships that can cover the world giving it a wider

sweep.

Moreover, despite the current bleak outlook for the gas market,

there is a fair amount of optimism that despite the possibility that

Australia and the US were preparing to ship out over 100 mtpa of LNG

by 2020, the market will be able to absorb the extra supplies, as demand

for gas picks up over the next two years due to growing concerns over

climate change. Many are hopeful that despite projections that growth

in the renewable energy market will impact demand for fossil fuels in

the global energy mix, the latter will remain the dominant players on

the global energy market and can be expected to remain so for decades

to come. In fact, Maria van der Hoeven, the IEA’s executive director,

recently stated that there was no future emission reduction scenario

under which oil and gas do not play “a significant role”, and said that

fossil fuels will still account for 60 percent of primary energy demand

in 2040 even if the world proves successful at getting on a pathway to

limiting temperature increases to 2 degrees celsius. Moreover, gas

producers and exporters are upbeat that although demand for coal and

oil may see a fall, demand for gas will grow due to its lower carbon

emissions as well as greater availability.

Another sector which has the potential to see the demand for gas

increase substantially is transport. According to some sector experts,

natural gas use in the transport sector has the potential to displace

around 1.5 mbd of oil by 2030, while a 10 percent diversion of LNG in

the heavy transport market would generate 70 million tonnes a year

of extra demand, which is equivalent to a year’s supply to Japan.

However, the lack of refuelling infrastructure is an obstacle in many

countries, although some countries, including India have been early

proponents of replacing oil with gas, both to reduce its growing oil

import dependence as well as to tackle growing air pollution on its


city roads. Another area where gas as an alternative fuel can make a

mark is in shipping. Tougher emission regulations in the US and the

EU have prompted the increased use of LNG as a transport fuel. HIS

Markit, an energy consultancy firm, forecasts that around 17 bcm of

LNG demand would come from the shipping sector over the next

decade, provided systems can be developed to address the issue of

storing LNG, given that gas has a larger volume than bunker oil,

requiring a larger amount of storage space, a major setback for ship

operators in terms of freight earned by cargo.24

If and when demand does pick up however – expectedly from 2020

onwards – will there be sufficient supplies, given the huge capital

investments and long gestation period, particularly from difficult

geological plays? Hence, at a time when gas demand begins picking

up, there is every likelihood that gas prices may ascend to the highs

of the pre-2014 period.

It is exactly this factor that has seen some countries forming

strategies to counter such an eventuality for their energy security. In

an attempt to revisit an idea in 2012, executives from the energy

industry of five Asian countries, viz., India, Japan, China, South Korea

and Taiwan, met in New Delhi in December 2014 to discuss ways to

form a group of buyers that would help them strike better deals for

their LNG imports. More recently in June 2016, India’s petroleum

minister Dharmendra Pradhan said that India would be taking the lead

in creating an alliance of gas importers across the world for “reasonable

and affordable” pricing of the fuel.25

All in all, despite the gloomy outlook for the gas market in the short

term, is likely to look up over the medium and long term. However,

creating demand to absorb the new supply will be a key challenge,

and much will depend on the national energy policies of key Asian

countries. With several new producers slated to come into the market,

low prices will in all likelihood continue for a while. While this will

24. Ian Lewis, “Oil’s sibling rival”, Petroleum Economist, Vol. 83, No. 8, October 2016,pp. 24-25.

25. “India taking lead to create alliance of gas importers: Pradhan”, One India, June14, 2016 at http://www.oneindia.com/india/india-taking-lead-create-alliance-gas-importers-pradhan-2127534.html


benefit importing countries, it has affected the profit margins of the

producers, with economically viable proven reserves being revised

downwards by at least 63 percent in the US alone, while in other

regions, such as Australia’s Gorgon plant, as well as Russia and

Canada, producers are facing a disadvantage vis-a-vis their competitors

in West Asia, whose cost of production is much lower.

As a result, it is necessary that a price that will not only be beneficial

for producers and consumers alike, but will also be competitive relative

to other competing fuels will be required to be worked out. While

pricing, contract durations and flexibility of destination are areas of

interest for consumers, return on investment and market share is of

the highest importance for the producers.

The gas, and indeed the energy world order, is in flux. While the

contours of a global gas market, as opposed to the current fragmented

and regionalised one, is taking shape, it is difficult to predict with

accuracy how it will develop in the medium to long term. The

globalisation of gas trade does indeed offer opportunities for new actors

– both producers and consumers – to enter the scene. However, it will

place some producers under pressure to adjust their business models,

and the future of the market will depend to a large extent on how and

if the traditional producers are ready and willing to adjust to the

changes in market fundamentals, which will also have implications

for other policy areas, including security, domestic and foreign policies.

INDEX

2015 Economic Report of the President, 36The Energy Revolution: Economic

Benefits and the Foundation for aLow-Carbon Energy Future, 36

Æwiek-Karpowicz, Jarosaw, 64Russia’s Grand Gas Strategy – the

power to dominate Europe?, 64

Abraham, Spencer, former US Secretariesof Energy, 36

Abu Dhabi National Oil Company, 102Advocate, The, 35Afanasyeva, Alla, 62

CPC pipeline oil exports down 7 pctin Jan, 62

Afghanistan, 18, 61, 77, 89, 110–11, 115,116, 176–7

Africa, 9–10, 21, 33, 55, 98, 103, 138, 150,182, 186–7, 192

Aguilera, Roberto, 7The Asia-Pacific Natural Gas Market:

Large Enough for All?, 7Ahmari, Sohrab, 127

The New Cold War’s Arctic Front, 127Ahmedinejad, Mahmoud, former Iranian

President, 71, 72, 85Akbaruddin, Syed, the spokesperson

India’s Ministry of External Affairs,143

Alakurtti, 134Alaska, 28, 36, 134Alberta, 158, 165Alberta Gas, 165Alexeeva, Olga, 135

China and the Arctic, 135Algeria, 9, 166

Al Jazeera, 89, 155Allegro Development, 29

The Shale Gas Revolution: What YouNeed to Know, 29

Almeida, Isis, 82, 83Iran Seeks $100 Billion for Gas as

World Fixates on Nation’s Oil, 82, 83Altai pipeline, 52, 64Al-Tamimi, Naser, 90

Navigating Uncertainty: Qatar ’sResponse to the Global Gas Boom,90

Al-Tamimi, Naseral, 90, 92, 98, 102, 106Al-Udeid Air Base, 95‘America First’ policy, 28, 41American gas, 31American Security Project, 37Andamans, 180Andhra Pradesh, 173, 179Anglo-Persian Oil Company, 67Annual Report of the Council of Economic

Advisers, 30Apicorp, 103Arab League, 89Arab Spring, 8, 31, 48, 76Arash, 76Arctic, 9, 15, 19–20, 47, 52, 57, 64, 126–7,

129–43, 195energy and mineral resources, 20, 143littorals, 19, 134natural resources, 142scientific expedition, 129sovereignty over the, 129territorial claims in the, 129

Arctic – America’s Last Energy Frontier,The, 133


Arctic Circle, 133, 139Arctic Council, 131, 134–9, 141–3Arctic Council Secretariat, 134–5

Kiruna Declaration, 134–5Arctic Golden Waterway, 142Arctic Monitor, The, 141Arctic Ocean, 57, 127, 129, 133, 142–3Arctic Potential: Realizing the Promise of

U.S. Arctic Oil and Gas Resources, 132Arctic Shelf, 140Arctic voyage, 137Arctic Yearbook 2012, 135Arktika 2007, 129Armenia, 82, 83Arunachal Pradesh, 179ASEAN, 22Ashgabat, 17–8, 110–11, 113, 115–6, 119,

121–5, 176–8, 188Ashgabat Declaration, 119Ashraf, Sajjad, 79

China link-up an opportunity and achallenge for Pakistan, 79

Asia, 7–8, 10–12, 14, 16, 18–9, 21–2, 25, 29,31, 33, 35–41, 49, 52, 56, 62–3, 75, 79,91, 95, 100–102, 106, 111–3, 115–8, 125,127, 130–31, 134, 136, 139, 141, 143, 146,150–51, 154–5, 159, 184–9, 191–2, 194,198

Asian Development Bank (ADB), 116, 177Asian LNG market, 8, 10, 11, 16Asia-Pacific Economic Cooperation, 146Asia Pacific Foundation of Canada, 131,

136Asia-Pacific market, 56Asia-Pacific region, 7, 19, 56, 184, 186, 189Asia Times, 112, 130Assam, 179Astakhova, Olesya, 104

Novatek eyes cooperation withQatarGas in LNG marketing—Russian energy minister, 104

Australia, 9–10, 16, 18–9, 23, 33, 81, 90–91,98, 101, 103, 106, 150, 154–5, 166, 182,186, 190, 195–6, 198gas producers of, 18, 100liquefaction plants, 16LNG, 19

production, 18

Austria, 53, 74Avasarala, Govinda, 23

Natural Gas in India: DifficultDecisions, 23

Azerbaijan, 18, 55, 58–9, 61, 83, 109, 118–9, 122

Azerbaijan and Turkmenistan, 118

Backes, Oliver, 18Central Asia in a reconnecting Eurasia:

Turkmenistan’s Evolving Foreign,Economic and Security Interests, 18

Bagtyýarlyk onshore natural gas project,113, 116

Baku-Novorossiysk pipeline, 61Baltic Course, The, 45Baltic Sea, 46, 53, 62Bangladesh, 176, 178Barclays, 97Barrel, The, 180Basin, 109, 158, 165, 168

Amu Darya, 109Godavari, 180Krishna, 180Krishna Godavari D-6, 165Mahanadi, 180Murgab, 109South Caspian, 109

Bazargan, 73Begliyev, Ashirguly, Chairman of

Turkmengaz, 151Behravesh, Maysam, 68

Iran and Britain: The Politics of Oil andCoup D’état before the Fall of RezaShah, 68

Belarus, 14–5, 46–7, 187Zeebrugge Hub, 7

Belfer Center, Harvard University, 17, 19,23

Bender, Jeremy, 134Russia Is Militarizing the Arctic, 134

Berdymukhamedov, Gurbanguly,President of Turkmenistan, 109, 112,123–4, 177

Bering Sea, 129Bhaskar, Utpal, 79, 178

India in talks with Russia, Iran ontransnational pipelines, 79, 178

Index 201

Bhutta, Zafar, 117, 188$2b North-South pipeline: Pakistan

asks Russia to further cut LNGsupply fee, 188

Japan, China companies win contractsfor TAPI project, 117

Bilateral relations, 51, 137, 138Birol, Dr Fatih, executive director of the

IEA, 2Black Sea, 46, 53Blackwill, Robert D., 13

America’s Energy Edge: TheGeopolitical Consequences of theShale Revolution, 13

Blagov, Sergei, 112, 130Russia sees new opportunities in

Central Asia, 112Russia’s partnership with China: An

alliance of necessity, 130Bloomberg, 41, 82–3, 103, 148, 190, 195

China’s Swapping EnergyIndependence for Cleaner Air, 148

Blueprint for a Secure Energy Future, 27Blumental, David, 150

The changing nature of China’s globaloil and gas deals, 150

Boersma, Tim, 53The Cancellation of South Stream is a

Pyrrhic Victory, At Best, 53Bohr, Annette, 108, 110, 115, 118

Turkmenistan: Power, Politics andPetro-Authoritarianism, 108

Boucher, Richard, former US AssistantSecretary of State for South andCentral Asia, 116

BPCL Ltd, 171BP Energy Outlook 2017, 27BP Plc., 172BP Statistical Review 2014, 95BP Statistical Review of World Energy, 69,

95, 108BP Statistical Review of World Energy 2015,

108BP World Energy Outlook 2017, 27BP World Energy Outlook 2035, 4, 101, 185Braaksma, Anne, 191

The Asian Quest for LNG in aGlobalising Market, 191

Brady, Jeff, 28America First’ Energy Plan Challenges

Free Market Realities, 28Brandeis University, 86Braw, Elisabeth, 133–4

Putin Makes His First Move in Raceto Control the Arctic, 133–4

Brazil, 138, 181Brent Scowcroft Center on International

Security, Atlantic Council, 31Brevik, Anne Kat, 11

The Tide Has Turned for the GlobalLNG Market: A Look Ahead to 2015and Beyond, 11

BRICS (Brazil, Russia, India, China andSouth Africa), 40, 138, 141

Bridas, 111Brookings, 53, 90Brown, Stephen P.A., 26

Assessing the US oil securitypremium, 26

Brunei, 159, 186BTC, 61Bulgaria, 37, 45–6, 51, 53, 82Bulletin of the Atomic Scientists, 86Business Insider, 134Business Standard, 143, 172, 180

India and US to join hands for gashydrates, 180

ONGC Videsh qualifies to bid for Iranoil, gas projects, 172

ONGC Videsh raises $1 bn in bondsto fund Vankor acquisition, 172

Busvine, Nidhi Varmaand Douglas, 164India to gradually move to gas-based

economy, Dharmendra Pradhansays, 164

Buurma, Christine, 41Shale Gas Supply Held Hostage by Oil

to Drop by Most in a Year, 41

Caixin Online, 158Canada, 29, 36, 41, 103, 127, 131–4, 136,

142, 150, 165, 195, 198Cañete, Miguel Arias, EU’s energy

commissioner, 82Cape Schmidt, 134Carbon emissions, 4, 13, 22, 30, 38, 161,


163, 184, 186, 196Caribbean Ocean, 33Carnegie Endowment for International Peace,

109, 123Caspian, 18, 58–9, 61–3, 74, 109, 111, 113,

118–9, 122, 187–8energy resources, 59

Caspian gas, 61–3control of, 63

Caspian littorals, 18, 119Caspian Pipeline Consortium (CPC), 61–

2Caspian Reserves, 58Caspian Sea, 18, 58–9, 74, 109, 111, 118–9,

122, 187energy resources, 58

Cassidy, Natasha, 19Australia and the Global LNG Market,

19Center for Energy Studies, 14, 19, 23Center for Security Studies, 15Center for Strategic and International

Studies (CSIS), 8, 18, 127CentGas, 111, 115Central Asia, 10, 12, 18, 22, 62–3, 111–3,

116–7, 125, 150–51Central Asia Bureau for Analytic

Reporting, 113Central Asia-Caucasus Analyst, The, 117Central Asia Caucasus Institute, 113Central Asian Gas Pipeline, 148, 151Central Asian Republics (CARs), 149, 155Central Europe, 46, 55Central Intelligence Agency (CIA), 68CEPA, 81Chahbahar Port initiative, 178Chakraborty, Debjit, 195

India’s Top Gas utility Seeks to DeferGazprom’s LNG Contract, 195

Chandrasekhar, C.P., 167Cost of reliance on gas, 167

Chatham House Research Paper, 108Cheniere Energy, 8, 23, 29, 41, 187

Sabine Pass LNG Terminal, 8, 29, 41Chen, Michael, 147

The Development of Chinese GasPricing: Drivers, Challenges andImplications for Demand, 147

Chesapeake Energy, 180Cheung, Francis, 22

A brilliant plan: One Belt, One Road,22

Chevron, 62, 63, 116, 171, 195China, 3, 8, 10, 14, 16, 18–22, 27, 29, 33,

39–40, 47–8, 50, 52, 56, 58, 64, 66, 72,79, 81, 86, 94, 98–9, 104, 109–10, 112–3,115, 117–8, 122–4, 129–31, 134–9, 141–2, 145–52, 154–6, 158–64, 173, 177–9,182, 184–90, 192–4, 19721st Century Oil Strategy, 149Arctic strategy, 135economy, 124, 147, 148energy consumption, 145energy security, 145, 161gas pricing in, 161gas procurement strategy, 148pipeline grid, 113pipeline imports, 155Shale Gas Policy, 156

China and India, 94, 137, 139, 141–2China and Russia, 40China and Turkmenistan, 113China Economic Review, 150China-Myanmar gas pipeline, 152China National Offshore Oil Corporation

(CNOOC), 8, 136, 149China National Petroleum Corporation

(CNPC), 18, 52, 58, 72, 104, 113, 116–7,137, 147, 149, 152, 158

China-Pakistan Economic Corridor(CPEC), 79, 177

China Petroleum & ChemicalCorporation, 149

China-Russia Gas Deal, 14Chinese National Offshore Oil Company,

159Chinese national oil companies (NOCs),

149–50Choudhary, Sanjeev, 173

Government weighs doublingcapacity of LNG terminal capacity,173

Chubin, Shahram, 71The Politics of Iran’s Nuclear Program,

71Civil nuclear deal, 77

Index 203

Cìwiek-Karpowicz, Jaros³aw, 51The power to influence Europe?

Russia’s grand gas strategy, 51Climate change, 1–4, 27, 38, 94, 101, 126,

139, 142, 146, 185, 196impact of, 2

CO2 emissions, 35, 38, 145–6Coal, 1–6, 18, 22, 27, 30, 34–5, 38, 48, 57,

81, 140, 145–8, 154–5, 160, 164–5, 168,173, 179, 181–2, 184–6, 196

Coal-bed methane (CBM), 5, 170, 179–81Coal seam gas (CSG), 18Cold War, 25, 127Cole, J. Michael, 130

Militarization of the Arctic Heats Up,Russia Takes the Lead, 130

Columbia University, 89Center on Global Energy Policy, 89

Commonwealth of Independent States(CIS), 50, 111

Compressed Natural Gas (CNG), 5–6, 151Conca, James, 2

Natural Gas – Not Renewables – IsReplacing Nuclear Power, 2

Conflicts, 15, 18, 48, 64, 71, 82, 104, 109,119, 149, 159, 177, 181, 187Russia and Ukraine, 64, 187

Conley, Heather, 127U.S. Strategic Interests in the Arctic An

Assessment of Current Challengesand New Opportunities forCooperation, 127

ConocoPhillips, 99, 102Copley, Caroline, 51

Russia’s Gazprom warns EU over gas,Ukraine, 51

Corbeau, Anne-Sophie, 191, 195LNG Markets in Transition: The Great

Reconfiguration, 195The Asian Quest for LNG in a

Globalising Market, 191Credit Lyonnais Securities Asia (CLSA)

2015, 22Crimea, 15, 45, 130, 154

Russia’s annexation of, 15, 45, 130, 154Crown Center for Middle East Studies,

Brandeis University, 86Crude, 3, 6–7, 10, 34–5, 72, 95, 97–8, 166,

168, 170, 181–2, 191, 193Japanese Customs-cleared, 98oil, 6–7, 95, 97, 166, 168, 170, 181, 193pipelines, 3price of, 34prices, 35, 182, 191

Cunningham, Nick, 37The Geopolitical Implications of U.S.

Natural Gas Exports, 37Currency swaps, 40Cyprus, 104Czech Republic, 37

Dakota Access, 28D’Arcy, William Knox, 67Daulatabad-Dariyalyk pipeline, 111Davis, Carolyn, 156

Russia-China Natural Gas Pipeline toCreate New Global PriceBenchmark, Say Analysts, 156

Democracy, 34Denmark, 127, 129, 133–6, 138, 142Dickel, Ralf, 55

Reducing European Dependence onRussian Gas: distinguishing naturalgas security from geopolitics, 55

Diplomacy, 22, 181energy, 181

Diplomat, The, 39, 116, 119, 130–31, 142Directorate General of Hydrocarbons

(DGH), 168–70, 180Hydrocarbon Exploration and

Production Activities, 169National Data Repository, 170

Discovered Small Field (Marginal) FieldPolicy, 170

Disputed waters, 122DNO, 72Dolphin Energy, 94Dolphin Pipeline, 76, 91–2, 94–5, 102Dorra, 76Dubnov, Arkady, 123

A new Russian turn to Turkmenistan?,123

Duggan, Jennifer, 146China makes carbon pledge ahead of

Paris climate change summit, 146Durdiyeva, Chemen, 113


China, Turkmenistan, Kazakhstan andUzbekistan launch Turkmenistan-China Gas Pipeline, 113

Dutch Shell, 6, 17, 72, 81, 171, 195

East Africa, 103East Asia Forum, 79East China Sea, 160Eastern Mediterranean Sea, 12East-West Pipeline, 18, 112, 121Ebinger, Charles, 23

Natural Gas in India: DifficultDecisions, 23

Economic crisis, 186Economic Times, The, 173, 182, 188

Arun Jaitley halves import duty onLNG to 2.5 per cent, 182

India, Russia to study building $25billion pipeline, 188

Economies of scale, 171Economy, 6, 13–4, 20–22, 26–7, 30, 36–7,

44–5, 50, 66, 71, 90–91, 97–8, 106, 109,124, 129, 136–7, 143, 145–8, 154, 160–61, 164–5, 171, 177, 186, 190, 193Asian, 20Chinese, 124, 147–8coal-based, 160domestic, 21, 90energy

clean, 27global, 14

fossil fuel-dominated global, 13gas-based, 22, 164, 186global, 13, 30, 136, 143Indian, 164Iranian, 71Japanese, 37political, 143Qatar’s, 91, 97Russian, 50, 106, 129Turkmen, 177Turkmenistan’s, 109, 124US, 26, 30

EEZ, 127–8, 133Egypt, 89, 103, 166, 192EIA 2012, 38EIA estimates, 21, 34, 36Eide, Espen Barth, Former Norwegian

External Affairs Minister, 140

E-International Relations, 68Electric Vehicles (EVs), 184Energy,

as strategic tool for foreign policy, 95bounty, 13diplomacy, 181economy

clean, 27global, 14

efficiency, 26, 38, 87, 185geopolitics, 26hydro, 27, 181independence, 28, 38, 73, 148, 168

global, 20, 24, 26, 143, 183, 196international, 70, 109over-supply of oil and gas in, 73Russian, 52

marketscontrol of the, 29East Asian, 51global, 20

needs, 27, 117, 139nuclear, 1, 4, 27, 37, 181, 189policy, 27–8, 44, 49, 90, 149, 160, 163renewable, 1, 3–4, 6, 27–8, 34, 101, 163–

4, 181, 185–6, 196security, 2, 4, 13, 20, 40, 45, 65, 132, 145,

154, 159, 161–2, 187, 197concerns, 20considerations, 13policy, 65, 159strategy, 187world’s, 162

superpower, 13, 40, 45, 129Energy basket, 2, 27, 137, 147, 164, 186Energy Economics, 11, 26, 189Energy Exchange, The, 166Energy geopolitics, 116Energy Information Administration (EIA),

US Department of Energy, 21, 29, 33–4, 36, 38, 41, 81, 83, 97, 109, 132, 156,159–60, 179, 194Expanded Panama Canal reduces

travel time for shipments of U.S.LNG to Asian markets, 33

Natural gas prices in 2017 and 2018 areexpected to be higher than last year,29

Index 205

Qatar, Country Analysis Briefs, 97Technically Recoverable Shale Oil and

Shale Gas Resources: China, 156Today in Energy, 33Turkmenistan, 109

Energy Insight, 49Energy Policy, 7Energy Post, 64Energy Strategy of Russia for the period

up to 2030, 56Eni, 85Environmental Protection Agency (EPA),

35Erdogan, Tayyip, Turkish President, 51Eskaf, Mahmoud, 77

Iran to start gas pumping to Iraq onTuesday, 77

ET Energy World, 148, 168China’s 2017 natural gas output to

jump to 170 bcm – energy agency,148

EU and Iran, 82Eurasia, 15, 18, 20, 21, 108, 118, 143Eurasia Group Report for The Wilson

Centre, 20, 143Opportunities and Challenges for

Arctic Oil and Gas Development, 20,143

Europe, 6–8, 14–6, 18, 22, 29, 31, 36–7, 40,43, 45–53, 55–6, 61–4, 73–5, 82, 91, 95,99–102, 111–2, 118–9, 121–3, 125, 127,130, 139, 142, 151, 154, 156, 185–8, 191,194gas market, 187

European Commission, 53, 121, 187European Development Bank, 177European Southern Corridor project, 112European Union (EU), 6, 37, 45–6, 48, 51–

3, 57, 64, 71, 73–5, 82, 111, 118–9, 121,125, 139, 145, 187–8, 193, 197environmental regulations, 139gas imports, 48imposed unilateral sanctions on Iran,

71Export(s), 8, 12, 15, 29–38, 40–41, 43–4, 46–

7, 49–50, 52, 55–7, 59, 61–2, 64, 68–70,72, 74–7, 79, 81–3, 87, 89–92, 94–5, 97–8, 102–4, 106, 109–10, 112–3, 115, 117–

8, 121–5, 136–7, 141, 150–52, 182, 187–8, 192LNG, 29, 34, 36–7, 40, 52, 57, 79, 87,

89, 94, 98, 104, 192oil and gas, 15, 30, 32, 49

US, 30, 32pipeline, 52routes, 52, 62, 113, 123, 188Russian, 56South Stream pipeline, 82

Express Tribune, The, 117, 188ExxonMobil Corporation, 23, 92, 101–3,

116, 171Gorgon facility in Australia, 23

Farchy, Jack, 37Russia cuts off gas supplies to Ukraine,

37Fattouh, Bassam, 89, 91

The US Shale Gas Revolution and itsImpact on Qatar’s position in GasMarkets, 89

Federal Energy Regulatory Commission(FERC), 31North American LNG Import/Export

Terminals Approved, 31Felix, Bate, 75

Total in talks to buy Iranian LNGproject: sources, 75

Feng, Bree, 131, 136China Looks North: Carving Out a

Role in the Arctic, 131Fennell, Thomas, 44

The Atlantic, 2008, 44Fevre, Chris Le, 6

The Prospects for Natural Gas as aTransport fuel in Europe, 6

Financial Express, 190Financial hegemon, 40Financial Times, 37Finland, 134, 138

‘Action Plan for India, 138Firstpost, 172

Union Budget 2017: An integrated oilgiant proposed to take on globalrivals, 172

Fishelson, James, 63From the Silk Road to Chevron: The


Geopolitics of Oil Pipelines inCentral Asia, 63

Floating LNG (FLNG), 75Forbes, 2, 50Foreign Affairs, 13, 48Forum, 165Fossil fuels, 1–6, 13, 27–8, 34, 38, 146, 184–

5, 196Foster, John, 116

Afghanistan, the TAPI Pipeline, andEnergy Geopolitics, 116

Fracking technology, 8, 13, 38France, 66, 72, 74–5, 81, 104, 116Free-on-board (FOB), 193Free Press, 67Frontline, 167Fuels, 1–6, 13, 24, 27–8, 32, 34–5, 38, 81,

92, 146, 155, 160–61, 164–5, 168, 176,181–2, 184–5, 196–8acceptable, 181alternate, 176alternative, 197“bridge”, 4, 6, 13bridge, 81cheaper, 168cleaner, 1, 4, 155, 160, 182fossil, 1–6, 13, 27–8, 34, 38, 146, 184–5,

196LNG, 92non-fossil, 146price of, 2pricing of, 197switching, 35, 161transition, 3, 164, 184transitional, 38transport, 197

Fukushima Daiichi disaster, 4, 57Fukushima nuclear accident, 4, 8, 10, 37, 57

Gaddafi, Muammar, Libyan strongman,89

GAIL India, 8, 195Gas-fuelled vehicles, 6Gas Superpower, 70Gas-to-liquids (GTL), 92Gazprom, 7, 17, 37, 43, 46, 50–51, 53, 57–8,

72, 74–5, 82, 111–2, 122–3, 130, 152, 191,195

oil-link vs spot gas prices, and storage,the Barrel, 191

Gazpromand, 14Gazprom Naft, 72Geopolitics, 12–4, 16, 19, 24, 26, 31, 55, 62–

3, 89, 111, 116, 130, 162, 186complicated nature of, 62demand, 19energy, 26oil market, 26traditional, 13versus price, 186

Geopolitics in the North, 130Georgia, 53, 61, 118, 187Germany, 51, 53, 62, 66, 74Glacier, 142Glacier melting, 142Global Energy Statistical Yearbook 2016, 26

Natural Gas Production, 26Global Finance, 97Global LNG: Will new demand and new

supply mean new pricing?, 5, 9Global Research, 40Global warming, 4, 13, 126–7, 129, 141Godzimirski, Jakub, 51, 64

Russia’s Grand Gas Strategy – thepower to dominate Europe?, 64

Going-Out strategy, 149Golden Pass LNG export project, 92, 102Goodrich, Lauren, 43

The Past, Present and Future ofRussian Energy Strategy, 43

Government of India, 169, 170, 173, 180Ministry of Petroleum and Natural

Gas, 169–70, 173Annual Report 2015-16, 173

Ministry of Petroleum & Natural Gas,180

Press Information Bureau, 180Identification of Extractable

Reserves of Shale Gas, 180Government of Japan, 193

Ministry of Economy, Trade andIndustry, 193Strategy for LNG Market

Development: Creating flexibleLNG Market and Developing anLNG Trading Hub in Japan, 193

Index 207

Grätz, Jonas, 15Deflating Russia’s Gas Pressure, 15

Great Britain, 3Great Game, 140–42Greece, 37Greenhouse gas (GHG), 27, 34, 139, 146

emissions, 146Greenland, 126–7, 129, 133–4, 136Gregory, Paul Roderick, 50

Russia’s Natural Gas Sales Plummet:Is Russia Captive To EuropeanBuyers?, 50

Griggs, Ted, 35Plans for export facilities in doubt, 35

Grushevenko, Ekaterina, 49Russian Oil Production Outlook to

2020, 49Guardian, The, 136, 146Gujarat, 172, 179Gulf Cooperation Council (GCC), 75, 89–

92, 94GCC-5, 90

Gulf States, 25, 76, 89–90, 101Guschin, Arthur, 142

China, Iceland and the Arctic, 142Gwadar Port, 79

Haas, Richard, 6Transatlantic Tensions: The United States,

Europe, and Problem Countries, 6Habibi, Nader, 86

Can Rouhani Revitalize Iran’s Oil andGas Industry, 86

Hafezi, Parisa, 85Iran sweetens oil contracts to counter

sanctions and price plunge, 85Hafner, Manfred, 53

Russian Strategy on Infrastructure andGas Flows to Europe, 53

Hamas, 95Harrigan, Frank, 91

Qatar’s Economy: Past Present andFuture, 91

Harris, Nigel, 7Should Natural Gas Prices in Europe

and Asia Be De-Linked From Oil?, 7Harvard International Review, 48, 74–5Harvard University, 17, 19, 23

Hasanov, Huseyn, 119Turkmenistan, Azerbaijan, Turkey

sign energy declaration with EU, 119Hassanzadeh, Elham, 68, 70, 72, 83–4, 87

Iran’s Natural Gas Industry in the post-revolutionary period: Optimism,Scepticism, and Potential, 68, 70, 72

Hawser, Anita, 97Qatar Faces Geopolitical Risk, 97

Hellenic Shipping News, 95, 99Qatar taking ‘aggressive’ stance in

Europe to mitigate LNG risks, 95, 99Helsinki’s vision document, 138Henderson, James, 49

Russian Oil Production Outlook to2020, 49

Henry Hub (HH), 7–10, 165Hille, Kathrin, 37

Russia cuts off gas supplies to Ukraine,37

Himadri, 139–40Hindu Business Line, The, 165Hindustan Petroleum Corporation

(HPCL), 171HIS Markit, 197Holland, 81Hu Jintao, Chinese President, 113Human rights, 108Human rights violations, 108Hungary, 37, 46Huntington, Hillard G., 26

Assessing the US oil securitypremium, 26

Hussein, Saddam, President of Iraq, 25, 77,95

Hussin, Farid, 191The Asian Quest for LNG in a

Globalising Market, 191Hydrocarbon, 1–4, 6, 19–20, 28, 40, 89, 103,

106, 110, 117, 124, 129, 131, 135, 137,141, 143, 159, 168–71, 179resources, 19, 28, 131, 135, 141, 168, 170

Hydrocarbon Exploration LicensingPolicy (HELP), 170

IAEE Energy Forum, 192Ibrahim, Ibrahim, 91

Qatar’s Economy: Past Present andFuture, 91


Iceland, 126, 134–6, 138, 142IEA New Policies Scenario 2014, 181IGAT-9, 74IGU World Gas LNG Report, 2016, 9

The World depends on Natural Gas, 9IHS Global Insight, 61IISS, 58Imports, 8, 10, 12, 20, 23, 26, 28–31, 36, 38–

9, 48, 55, 57–8, 63, 74, 76, 83, 90, 99,111–2, 121, 124, 131, 148–52, 154–6,161–2, 166–9, 182, 186, 188–9, 194, 197gas, 8, 12, 26, 39, 48, 57–8, 63, 90, 112,

121, 148, 150–52, 155–6, 161–2LNG, 10, 23, 55, 99, 148, 151, 154–5,

161, 166, 182, 188–9, 194, 197pipeline, 148, 151, 155, 194

Chinese, 155Russian gas, 55

Independent Barents Observer, The, 141India, 8, 18, 22–3, 27, 33, 40, 52, 61, 67, 70,

77, 79, 94, 99, 102, 110–11, 115–7, 134,137–43, 163–6, 168–73, 176–83, 186,188–97BJP-led NDA government, 167demand for energy, 163, 168demonetisation drive, 182dependence on gas, 166economy, 164energy

agenda, 164consumption, 165mix, 181needs, 139

gas market, 181gas sector, 164

challenges for, 164interest in shaping policies, 142LNG import, 168membership in the Arctic Council, 138natural gas

demand, 22reserves, 164

NDA government, 167oil companies, 141, 171, 178refusal to participate in many global

programmes to cut GHG emissions,139

residual gas reserves, 169

strategic interests in the Arctic, 138strong presence and intervention

capabilities in the Indian Ocean, 142UPA government, 166

India and Iran, 176India and Pakistan, 61, 116India and Russia, 141India and the Nordic states, 137Indian and Norwegian, 140Indian Express, The, 143, 178

India in Arctic Council with observerstatus, 143

Official talks on Myanmar-India-Bangla pipeline to start soon, 178

Indian Ocean, 22, 142Indian Oil Corporation (IOC), 171Indo-Danish relations, 138Indonesia, 154–5, 159, 186, 192Indo-Norwegian strategic ties, 138Institute for Energy Research, 41

U.S. Becomes a Net Energy Exporterin EIA Forecast, 41

Institute of Energy Economics, Japan, 11,189

Institute of Energy Strategy, 2010, 56Institut Français des Relations Internationales

(IFRI), 109Interfax, 104, 105International Arctic Research Base, 139International Energy Agency (IEA), 1–4,

9, 22, 51, 148, 163, 181, 184–5, 191, 194,196Medium-Term Gas Market Report 2016,

148, 184–5New Policies Scenario 2014, 181

International Energy Outlook 2016, 194Natural Gas Prices in Asia, Natural

Gas, 194International Gas Union, 192

2016 World LNG Report, 192World Gas LNG Report, 9, 192

International Monetary Fund (IMF), 98,106, 182World Economic Outlook: Uneven

Growth—short-and long-term Factors,182

International Relations and Diplomacy, 22IOCs, 69–70, 72, 150, 172

Index 209

Iran, 6, 9, 16, 17, 23, 30, 39–41, 48, 58–9,61, 66–77, 79, 81–8, 92, 95, 98, 103–6,109–11, 116, 118–9, 121–3, 147, 164, 172,176–8, 187–95-Year National Develop Plan, 81Britain’s control over, 68economy, 71export capacity, 75gas industry, 83gas reserves, 77LNG export facility, 75, 81LNG projects, 81nuclear capabilities, 66nuclear facilities, 71nuclear programme, 82sanctions imposed on, 66, 69, 73, 79,

86, 103lifted from 2016, 103US, 72, 75, 118

Iran and Kuwait, 76Iran and Russia, 23, 59Iran and the USSR, 59

1921 Friendship Treaty, 59Iran Daily, 77

Iran to start gas exports to Iraq in amonth: Official, 77

Iranian-American relations, 39Iranian gas, 9, 73–7, 82–3, 87, 118Iranian nuclear issue, 9Iranian pipeline, 79Iranian Revolutionary Guards Corps

(IRGC), 85–6Iran-Iraq Pipeline, 79Iran-Iraq-Syria pipeline, 48Iran-Oman Pipeline, 79Iran-Pakistan-India (IPI) pipeline, 70, 77,

79, 116, 176–7Iran-Pakistan Pipeline, 79Iran Petroleum Contract (IPC), 72, 84–5Iran’s Islamic Revolutionary Guard Corps,

86Iran’s Natural Gas Industry in the post-

revolutionary period: Optimism,Scepticism, and Potential, 70

Iran-Turkmen gas trade, 121, 123Iran-UAE Gas Contract, 81Iraq, 25, 48, 70, 77, 79, 83, 89

invasion of Kuwait, 25, 95

Islamic Development Bank (IDB), 177Islamic Revolution, 69Italy, 51, 53, 74, 134, 139ITE Oil & Gas, 117

Turkmenistan’s rising gas productionand international exports: A Guide,117, 123

Izimov, Ruslan, 113, 118China and Turkmenistan – a Regional

Dimension, 113

Jacobs, Justin, 161China’s natural gas demand sputters,

147, 161Jaffe, Amy Myers, 48

China’s Energy Hedging Strategy:Less than meets the eye for RussiaGas Pipelines, 48

Jalilvand, David Ramin, 76Iran’s Gas Exports: Can past failure

become future success?, 76James A. Baker III Institute for Public

Policy, Rice University, 14, 17, 19, 23Japan, 10, 18, 29, 33, 36–7, 40, 47, 56–7, 91,

94, 98–9, 102, 115, 117, 131, 134, 139,147, 159–60, 177, 180, 185, 188–90, 192–4, 196–7economy, 37liberalisation of wholesale gas market,

194Japan Crude Cocktail (JCC), 7, 10, 98, 166,

168Jiang Zemin, Chinese Premier, 149Joint Comprehensive Plan of Action

(JCPOA), 66, 86Joint venture, 85, 99, 101–2Jordan, 48, 192Journal of Energy Security, 21, 116

Kaletovic, Damir, 79Iran May Cancel $7B Pipeline Project

With Pakistan, 79Kalyanaraman, Anand, 165

All you wanted to know about: GasPricing Formula, 165

Kantchev, Georgi, 45With U.S. Gas, Europe Seeks Escape

From Russia’s Energy Grip, 45


Kara Strait, 127Kar, Sanjay Kumar, 168

How bullish is the outlook for oil andgas industry in 2017?, 168

Kashfi, Mansour, 72Is A Full Recovery Possible For Iranian

Oil And Gas?, 72Katakey, Rakteem, 82–3

Iran Seeks $100 Billion for Gas asWorld Fixates on Nation’s Oil, 82, 83

Kazakhstan, 47, 58–9, 61, 62, 110, 113, 122,151

Keller, John, 134Arctic surveillance is the result of East-

West political tensions in the polarregions, 134

Kemp, Geoffrey, 6The Challenge of Iran for US and

European Policy, 6Kennedy, Charles, 187

North-American LNG Could WeakenRussia’s Grip On Europe, 187

Kevin Yao, 160China growth slowest in six years,

more stimulus expected soon, 160Keystone XL, 28Khalid, Hafsa, 159

Pivot to Asia: US Strategy to ContainChina or to Rebalance Asia?, 159

Khamanei, Ali, Iranian Supreme Leader,86

Khatami, Mohammed, Iranian President,71, 86

Khatinoglu, Dalga, 76Oman’s gas deal with BP not to

undermine Iranian gas import, 76Khurshid, Salman, Former External

Affairs Minister, 140King Abdullah Petroleum Studies and

Research Center, 195Kiruna Declaration, 134–5Koenig, Peter, 40

Russia and China: The Dawning of aNew Monetary System?, 40

KOGAS, 8KohGui Qing, 160

China growth slowest in six years,more stimulus expected soon, 160

Kosev, Mitch, 19Australia and the Global LNG Market,

19Krane, Jim, 89, 94

Qatar ‘rises above’ its region:Geopolitics and the rejection of theGCC gas market, 89

Kraut, Jamie, 127U.S. Strategic Interests in the Arctic An

Assessment of Current Challengesand New Opportunities forCooperation, 127

Krishna, S.M., Indian Foreign Minister,138

Krysiek, Timothy Fenton, 129The Battle for the Next Energy

Frontier: The Russian PolarExpedition and the Future of ArcticHydrocarbons, 129

Kuchins, Andrew C., 18Central Asia in a reconnecting Eurasia:


Kupchinsky, Roman, 43Russia: Gazprom –A Troubled Giant,

43Kuwait, 25, 76, 89, 94–5

invasion of, 25, 95Kuwait Programme on Development,

Governance and Globalisation in theGulf States, 89

Kyrgyzstan, 113, 123, 151

Lai, David, 39China: A Solution in the Middle East?,

39Lain, Sarah, 116

European Energy Security andTurkmenistan, 116

Lanthemann, Marc, 43The Past, Present and Future of

Russian Energy Strategy, 43Laos, 56Lasserre, Frédéric, 135

China and the Arctic, 135Latecomer, 2, 182Latin America, 8, 21–2, 150Lavrov, Sergey, Russian Foreign Minister,

123

Index 211

visit to Turkmenistan, 123Lebanon, 86, 89Ledesma, David, 195

LNG Markets in Transition: The GreatReconfiguration, 195

Levi, Michael, 34Fracking and the Climate Debate, 34

Lewis, Ian, 197Oil’s sibling rival, 197

Liberation Tigers of Tamil Eelam (LTTE),138

Li, Jennifer, 186China Gas to benefit as coal to gas

switch brings on millions of newusers in northern areas, 186

Lindgren, Wrenn Yennie, 57Energizing Russia’s Pivot: Japan-

Russia energy relations, post-Fukushima and post-Ukraine, 57

Line A, 113Line B, 113Line C, 113Line D, 113, 122, 151Lingwall, Noah, 39

China: A Solution in the Middle East?,39

Liquefied natural gas (LNG), 3, 5–6, 8–11,16–9, 22–4, 29, 31–8, 40–41, 45, 47, 52,55–7, 63–4, 69, 74–7, 79, 81–2, 84, 87,88–92, 94–5, 97–104, 106–7, 115, 130–31, 137, 141, 147–8, 150–51, 154–5, 161–2, 164, 166, 168, 172–3, 176–9, 182, 185,187–97as a harbinger for change, 9contracts, 34, 98, 190, 195exports, 29, 34, 36–7, 40, 52, 57, 79, 87,

89, 94, 98, 104, 192imports, 10, 23, 55, 99, 148, 151, 154–5,

161, 166, 182, 188–9, 194, 197infrastructure, 35, 107, 147Omani, 74projects, 34, 52, 69, 75, 81, 84, 104, 130–

31, 137, 182, 195Iran’s, 81proposed, 195Sakhalin, 52US, 34Yamal, 130–31

technology, 52, 69vessels, 100, 107, 196

Littorals, 18–9, 58–9, 109, 119, 122, 127,134–5, 159Arctic, 19, 134Caspian, 18, 119states, 58–9, 109, 119, 122, 159

Livemint, 79LNG World News, 100, 188

India eyeing LNG imports fromRussia, 188

QatarGas and RasGas to merge, 100Lombok Strait, 159Lomonosov Ridge, 128–9, 137London School of Economics and Political

Science, 89Longyearbyen, 140Louisiana, 29Luft, Gal, 21

What does America’s shale gasrevolution mean for China, 21

Lukoil, 62, 72, 85LVMH, 97

Malacca syndrome, 142Malaysia, 81, 159, 166, 186, 192, 195Malik, Naureen, 41

Shale Gas Supply Held Hostage by Oilto Drop by Most in a Year, 41

Mankoff, Jeffrey, 18Central Asia in a reconnecting Eurasia:


Manning, Robert, 31The Shale Revolution and the new

Geopolitics of Energy, 31Markets, 3–4, 6–26, 28–31, 33, 36–8, 40–42,

45–53, 56, 58, 61, 63–5, 67, 69–71, 73–5,77, 81–4, 87–92, 94, 97–104, 106–10, 112,115, 117–8, 124–5, 131, 143, 145, 147–9,151, 154–5, 162–4, 166–8, 170–72, 177,179, 181–98Asian, 6, 37, 52, 56, 77, 101, 115Asia-Pacific, 56cap, 171, 172Chinese, 149, 186, 188electricity, 30

global, 20, 24, 26, 143, 183, 196


international, 70, 109over-supply of oil and gas in, 73Russian, 52

energycontrol of the, 29East Asian, 51global, 20

European, 7, 15, 45–6, 49–52, 58, 64, 82,91, 100, 109, 115, 118, 182, 187–8

European Union (EU), 6gas, 3, 6, 8, 11–4, 16, 19, 22–4, 29, 31,

36–8, 40–41, 48, 50, 52–3, 58, 63, 74,81–3, 89, 91–2, 97, 103, 108, 124, 147,154–5, 162, 164, 179, 181–5, 187–9,191, 194, 196–8changing trends in the, 6Europe’s, 187impact of a changing, 97Indian, 181

global, 37, 145globalised, 31Japanese, 7North American, 6, 26

geopolitics, 26oil and gas, 13, 50, 74, 154

European, 50, 74, 154options, 73, 115overseas, 23, 33projections, 98security of, 20South Asian, 61, 77, 115

liberalisation of, 194US, 9, 23, 31

oversupply in, 9Mattis, James, US Defense Secretary, 131Maugeri, Leonardo, 34Media, 9, 57, 89, 108, 117, 133, 142, 163

Chinese, 142Japanese, 57Pakistani, 117Russian, 133

Medlock III, Kenneth B., 48China’s Energy Hedging Strategy:

Less than meets the eye for RussiaGas Pipelines, 48

Medvedev, Dmitri, Russian President, 112Melton, Michelle, 8

Coming Changes in the Asian LNG

Market?, 8Mendeleev Ridge, 128, 137Mexico, 28–9, 36, 133Middle East, 22, 39, 62, 67, 77, 85–6, 106Middle East Brief, 86Middle East Economic Survey (MEES), 85,

102, 106IMF warns Qatar of Budget deficit, 106Iran goes the extra mile with new Oil

Contracts, 85Qatar looks to adapt amid shifting

global LNG landscape, 102Middle East Observer, 77Militarisation, 19, 133Military & Aerospace, 134Ministry of Energy of the Russian

Federation, 56Mint, 178Mirpuri, Ashok Kumar, Singapore’s

Ambassador to the United States, 40U.S. Energy Exports: Geopolitical

Implications and Mutual Benefit, 40Mitrova, Tatiana, 14, 49

Looking East Amid a Crisis to theWest: Russia’s Export Strategies, 49

The Geopolitics of Russian NaturalGas, 14

Mitsui, 57, 99Modi, Narendra, Indian Prime Minister,

141, 163penchant for renewable energy, 163

Mohammed Shah Reza, 68Momoko, Aoshima, 189

Economic and Energy Outlook ofJapan through FY2017, 189

Mongolia, 40Morikawa, Tetsuo, 11

Outlook and Challenges for GasMarkets in 2015, 11

Morocco, 104Moscow and Tehran, 82Mossadegh, Mohammed, Iranian Prime

Minister, 68Multilateral Investment Guarantee

Agency, 138Muscat, 76Muslim Brotherhood, 89Myanmar, 10, 149, 152, 164, 176, 178, 188

Index 213

Myanmar-Bangladesh-India (MBI), 178Myers, Steven Lee, 48, 142

Arctic Council Adds 6 Nations asObserver States, Including China,142

Mys Shmidta, 134

Nair, Shailaja, 180Shale gas to rock the Indian energy

scene? Some say yes, but..., 180Nakano, Jane, 8

Coming Changes in the Asian LNGMarket?, 8

National Balancing Point (NBP), 7, 11, 165National Bureau of Asian Research (NBR),

48–9National Development and Reform

Commission (NDRC) of China, 146,160, 186Department of Climate Change, 146

Enhanced Actions on ClimateChange: China’s intendednationally determinedcontributions, 146

National Gas Hydrate Programme(NGHP), 180

National Grid Plc., 103National Iranian Oil Company (NIOC),

69, 72, 83, 85National Public Radio (NPR), 28National Security Presidential Directives

(NSPDs), 132National Security Strategy, 132NATO, 15, 133Natural gas, 2–7, 9, 12, 14, 16–7, 19, 20,

22–3, 26–37, 41, 43–4, 47–8, 50–51, 53,55, 57–9, 61, 63, 68–70, 72–3, 76–7, 81–4, 87, 89–90, 95, 97, 101, 108–11, 115–6,119, 121–2, 126, 143, 147–8, 151–2, 154–6, 159–64, 168–73, 177, 180–82, 184–6,192, 194, 196demand, 9, 22, 101, 147, 161demand for, 3, 147deposits, 59development, 19, 35

unconventional (shale), 35development of, 36domestic, 36

future of, 2industries, 30infrastructure, 36piped, 23price of, 3, 7, 23, 31, 35, 36, 154production, 26, 29, 33, 35resources, 4–5, 12, 47, 70supplies of, 5

in the US, 23“unconventional”, 5

trajectory, 3use of, 3, 34vehicles, 6

Natural Gas Europe, 51, 121–2Potential routes for delivering

Turkmen gas to EU, 121The momentum for the trans-Caspian

pipeline, 122Natural Gas: History, 3Natural Gas Intel, 156Natural gas transmission pipeline, 173NBR Energy Security Program, 48NDTV, 140Neftegaz RU, 74

Iran hails Russia in Europe gastransfer plan, 74

Negishi, Mayumi, 190Japan steps on gas in bid to reshape

LNG market, 190Nehru, Jahawarla, First Prime Ninister of

Indiavisit to Copenhagen in 1957, 138

Netherlands, the, 7Title Transfer Facility (TTF), 7

New Europe, 51New Exploration Licensing Policy

(NELP), 138, 167, 169–71New Great Game, 140–41Newsweek, 133–4New York Times, The, 28, 139, 142

Obama’s 2013 State of the UnionAddress, 28

New Zealand, 181Nigeria, 166, 186Nixon, Richard, US president, 28Noel, Pierre, 58

The Power of Siberia natural-gasproject: commercial or political?, 58


Nord Stream, 37, 46, 52–3, 62, 187North Africa, 55, 187North America, 8, 28, 150, 194Northeast Passage, 127, 136Northern Sea Route (NSR), 127, 131, 137,

142North Field, 82, 89–90, 92, 101, 103–5North Pars, 81North Pole, 129, 133North-South pipeline, 188Northwest Passage, 127Norway, 45, 72, 126–7, 132–4, 136, 138, 140,

186Norwegian Institute of International

Affairs (NUPI), 57Novatek, 47, 57, 104, 137Nowak, Zuzanna, 51, 64

Russia’s Grand Gas Strategy – thepower to dominate Europe?, 64

The power to influence Europe?Russia’s grand gas strategy, 51

Nuclearaccident, 8agreement, 98capabilities, 66deal, 39, 66, 77, 86, 103

civil, 77energy, 1, 4, 27, 37, 181, 189facilities, 71negotiations, 48, 74–5plants, 186, 189power, 8, 10, 27, 146power stations, 10strike force, 39

Ny Alesund, 140Nyazov, President of Turkmenistan, 113,

124

Obama, Barack, US President, 27–8, 35,132–3, 142

Offshore Magazine, 195Report finds nearly $230 billion in oil

and gas projects deferred, 195OIL, 171, 179Oil and gas,

American, 31Caspian, 61, 62, 63cross-border, 94

crude, 6, 7, 95, 97, 166, 168, 170, 181,193

demand, 3, 69, 79, 83, 92, 94, 102, 111,147–8, 161, 163–4, 185, 192, 196

exports, 15, 49opportunities and challenges for, 33US, 30, 32

imports, 8, 12, 26, 39, 48, 57–8, 63, 90,112, 121, 148, 150–52, 155–6, 161–2

Iranian, 9, 67–8, 73–7, 82–3, 85, 87, 118markets, 3, 6, 8, 11–4, 16, 19, 22–4, 29,

31, 36–8, 40–41, 48, 50, 52–3, 58, 63,74, 81–3, 89, 91–2, 97, 103, 108, 124,147, 154–5, 162, 164, 179, 181–5, 187–9, 191, 194, 196–8changing trends in the, 6European, 50, 74, 154, 187geopolitics, 26impact of a changing, 97Indian, 181liberalisation of, 194

pipelines, 28, 52, 55, 113, 119, 148, 150–51, 156, 161, 173, 194Central Asian, 148, 151China-Myanmar, 152IPI (Iran-Pakistan-India), 116

prices, 7–8, 11, 13, 20–21, 23–4, 29, 31,35–6, 47, 50, 52, 64, 84, 90, 94, 98, 106,111, 122–3, 125, 161, 167, 177, 179,185, 190–91, 197

production, 28, 85Qatari, 94recovery applications, 90reserves, 25, 69, 95, 109Russian, 31, 37, 38, 40, 45–7, 52–3, 55–

6, 58, 63, 73–4, 123, 165, 178, 187sources of, 25–6unconventional, 161, 179

Oil and gas fields, 4, 15, 17–8, 25, 29, 43,46–7, 49–52, 57–9, 61–2, 64, 67, 69–70,73–6, 81–2, 83, 85, 89, 91, 103–6, 108–9,111, 113, 116–7, 119, 121–2, 124, 126,130, 138, 141, 149, 151–2, 158, 169–73,176, 178, 188Baku, 43, 61, 109, 118Caspian, 61Daulatabad, 111Farzad B, 172, 178

Index 215

Ferdosi, 81Galkynysh, 18, 109, 116, 176Golshan, 81Kurmangazy, 61North, 82, 89–90, 92, 101, 103–5offshore, 61Shah Deniz, 59South Pars, 73, 104, 121Turkmen, 113Volga, 43Zohr, 103

Oil and Gas Journal, 45, 61Oil and Natural Gas Corporation (ONGC),

141, 171–2, 178–9, 181Oil & Gas Journal, 158

BP, CNPC sign second Chinese shalegas PSC, 158

Oil & Gas News, 104Iran Review 2013, 104

Iran, Qatar face off over North Field,South Pars, 104

Olcott, Martha Brill, 17, 111Natural Gas and Geopolitics: From 1970

to 2040, 111Turkmenistan: Real Energy Giant or

Eternal Potential?, 17Olearchyk, Roman, 37

Russia cuts off gas supplies to Ukraine,37

Oliver, Christian, 18, 37Russia cuts off gas supplies to Ukraine,

37Oman, 62, 75–7, 79, 92, 94, 164, 166, 178One-Belt-One-Road (OBOR), 22, 118, 149One India, 197

India taking lead to create alliance ofgas importers: Pradhan, 197

ONGC Videsh Ltd (OVL), 172Operation Nanook, 129Orange Revolution, 47Orenstein, Mitchell A., 48

Putin’s Gas Attack: Is Russia Just inSyria for the Pipelines?, 48

Organisation of Petroleum ExportingCountries (OPEC), 11, 41, 63, 85, 88–9,143

Osborn, Andrew, 131Putin’s Russia in biggest Arctic

military push since Soviet fall, 131O’Sullivan, Meghan L., 13, 48

America’s Energy Edge: TheGeopolitical Consequences of theShale Revolution, 13

China’s Energy Hedging Strategy:Less than meets the eye for RussiaGas Pipelines, 48

Over-the-counter (OTC), 193Ovozi, Qishloq, 121, 123

Russia Flexes Its Muscles InTurkmenistan, 123

Still One Big Obstacle to Turkmen Gasto Europe, 121

Oxford Institute for Energy Studies (OIES)Paper, 6, 10, 55, 147, 152

Oxford Institute for Energy Studies (OIES),The, 6, 10, 49, 52, 55, 68, 70, 72, 76, 129,147, 152, 165

P5+1, 9, 16, 39, 66, 98Joint Comprehensive Plan of Action

(JCPOA), 66, 86Pacific Ocean, 33Paik, Keun-Wook, 152

Sino-Russian Gas and OilCooperation: Entering into a NewEra of Strategic Partnership?, 152

Pakistan, 18, 40, 61, 70, 77, 79, 100, 102,111, 115–6, 176–7, 188–9, 192

Panama Canal, 33, 41, 127Pandey, Sidharth, 140

India to expand engagement in theArctic, 140

Parasie, Nicolas, 98Qatar Risks Budget Deficit in 2016 Due

to Low Oil Prices, IMF Says, 98Paton, James, 190

China Joins India Seeking Better LNGContracts for Buyers, 190

Peninsula, The, 99India renegotiates LNG agreement

with Qatar: Indian minister, 99Persian Gulf, 22, 25, 28, 59, 75–6, 88, 92,

176Persian Pipeline, 73–4

capacity of the, 74Perspective, 37


PetroChina, 99, 130Petroleum Economist, 147, 161, 197

China’s natural gas demand sputters,147, 161

Petroleum Planning & Analysis Cell, 173Gas Pipeline Network, 173

Petronas and Petrofield LNG Co., 81, 195Petronet LNG, 99Petropars, 72PGNiG, 81, 102Philippines, 159Pioneer, The, 181Pipeline(s), 3, 9–10, 14, 16–8, 28–9, 31, 36,

44, 46, 48, 50–53, 55–7, 59, 61–4, 70, 73–9, 81–3, 91, 92, 94–5, 102, 109–13, 115–9, 121–4, 147–52, 155–6, 158, 161, 173,176–9, 182, 185, 187–9, 194Altai, 52, 64American-sponsored, 63Baku-Novorossiysk, 61bilateral, 179Blue Stream, 46Bratstvo, 46building, 122Central Asian Gas Pipeline, 148, 151China-Myanmar gas, 152Chinese, 155connections, 56connectivity, 194construction of, 59, 73–4, 112, 122–3,

152cross-border/cross-country, 29, 94, 121crude, 3Dakota Access, 28Daulatabad-Dariyalyk, 111deals, 16, 155Dolphin, 92, 94, 102domestic, 46East-West, 18, 112, 121environmental consequences of, 119explosion in, 111exports, 52gas, 52, 55, 113, 119, 148, 150–51, 156,

161, 173, 194export, 70

grid, 113imports, 148, 151, 155, 194infrastructure, 109, 112

initiatives, 118Iranian, 79Iran-Iraq, 79Iran-Iraq-Syria, 48Iran-Oman, 79Iran-Pakistan, 79Iran-Pakistan-India (IPI) pipeline, 116,

176Keystone XL, 28leak in, 102Mozdok-Gazi-Magomed, 46natural gas transmission, 173network of, 14, 17, 46, 50, 59, 73, 81,

91, 110, 158, 173Nord Stream, 46, 52–3, 62, 187North Caucasus, 46Northern Lights, 46North-South, 188oil, 28operational, 62options, 188Persian, 73–4planned, 77politics, 112pressure, 112Prikaspiisk, 122projects, 51, 70, 77, 82, 113, 115–6, 147,

173, 176, 178–9, 189proposed, 187purposes of, 122routes, 44, 77, 188Russia-China Natural Gas Pipeline,

156Russian, 55, 64, 110, 112Sakhalin-2, 57South Stream, 46, 51–3, 82Soviet, 59Soyuz, 46strategy, 150submarine, 53sub-sea, 59, 76, 122, 178supplies, 55, 64Tabriz-Ankara, 73TAPI, 113, 189trade, 29Trans-Afghan, 111, 115Trans-Anatolian Natural Gas Pipeline

project (TANAP), 74, 119

Index 217

Trans-Anatolian Pipeline (TANAP), 74trans-Caspian, 18, 63, 113, 118, 122transnational, 79, 176, 178transportation, 156, 194trilateral, 179Turkmen-China, 124Turkmenistan-Afghanistan-Pakistan-

India (TAPI), 18, 23, 61, 77, 113, 115–7, 123, 164, 176–7, 189

under-sea, 79undersea, 77upstream, 102West-East, 151West-East Gas, 150West-East trunk, 151Yamal-Europe I, 46

Pirani, Simon, 52Does the cancellation of South Stream

signal a fundamental reorientationof Russian gas export policy?, 52

Platts, 69, 99–100, 155China’s March natural gas pipeline

imports rise 41.3% on year to 2.73Bcm, 155

Chinese April LNG imports reach 1.5mil mt, significant cuts to Qatarvolumes, 99

Iran shortlists 29 IOCs to bid forupstream oil, gas tenders, 69

Poland, 45, 53, 81, 102, 192Policy for Extension of Production-

Sharing Contracts, 170Policy Paper Series – Transforming Ideas

Into Solutions, The, 32, 41Prosperity at Home and Strengthened

Allies Abroad – A Global Perspectiveon Natural Gas Exports, 32, 41

Policy Perspectives, 15Policywatch, 73, 82POLINARES Working Paper, 53Politics, 16, 26, 28, 58, 68, 71, 112, 122, 126,

150, 182domestic, 16energy, 182oil-related, 26pipeline, Russian, 112power, 126

Pollmann, Mina, 131

How Japan and Russia Cooperate inthe Arctic?, 131

Power of Siberia, 58, 152Pradhan, Dharmendra, Indian petroleum

and natural gas minister, 77, 164, 197Prevost, Victor, 141

Arctic resources to boost Russia’s pivotto Asia, 141

Price/Pricing, 1–11, 14–5, 17, 19, 30–31,34–5, 37–8, 40, 41, 45, 47–51, 58, 63–4,76–7, 79, 81, 85, 87, 90–92, 94–5, 98–100, 102, 104, 106–7, 109, 111, 116–7,122–3, 127, 129, 144, 147–9, 154–6, 161–2, 164–70, 177–8, 183, 185–98advantage, 34, 35crude, 34flexibility on, 123formulae, 11, 38gas, 7–8, 11, 13, 20–21, 23–4, 29, 31, 35–

6, 47, 50, 52, 64, 84, 90, 94, 98, 106,111, 122–3, 125, 161, 167, 177, 179,185, 190–91, 197US, 13, 191

geopolitics versus, 186market-linked, 166mechanism, 7, 14, 162, 166, 168, 189,

191, 193natural gas, 23, 31, 35–6

in the US, 23oil-indexed, 10–11, 37, 106, 190–91retail, 11, 30, 34

European, 11US hub-based, 11

Prikaspiisk pipeline, Russian-backed, 122Production Sharing Agreements (PSAs),

61, 109, 116Production Sharing Contract (PSC), 158,

169Putin-Abe summit brings big Japan-

Russia economic projects, 57Putin, Vladimir, Russian President, 15, 44,

47–8, 51, 56–7, 123, 131, 133–4, 141visit to India, 141

Putin, V. V., 44Mineral and Raw Materials Resources

and the Development Strategy forthe Russian Economy, 44

Putz, Catherine, 119, 122


Europe could be getting Turkmen gasby 2020, 119

Qatar, 16–8, 23, 29, 33, 40, 48, 81–2, 88–92,94–5, 97–107, 155, 166, 168, 172, 179,186, 190, 196challenges for, 103economy, 91, 97energy companies, 101energy policy, 90gas exports, 91, 95

reliance on, 91gas marketers, 94geographical location, 101investment in overseas blocks, 104LNG exports, 94, 98, 104oil-indexed pricing, 106options, 101policy of signing long-term contracts,

97Qatar and Iran, 40, 105QatarGas, 99–100, 104Qatar Investment Authority, 101Qatar Petroleum (QP), 94–5, 99, 101–2Q-Flex, 107, 196Q-Max, 107, 196QScience Connect, 91

Radcliff, Verity, 104Total eyes South Pars project FID in 3-

6 months, 104Radio Free Europe Radio Liberty, 43, 121,

123Rajasthan, 179Ramazani, Azizollah, international affairs

director at National Iranian GasCompany, 83

Rao, Prasad, lead scientist and PhDscholar at UNIS, 140

RasGas, 94, 99–100, 190, 193Reliance Industries Ltd (RIL), 165–6Report on Committee on Gas Pricing-2014,

167Repsol, 81Reserve Bank of Australia, 19

Bulletin, 19Reuters, 11, 51, 62, 75, 77, 85, 104, 131, 150,

160, 164, 177

Iran, Oman reaffirm gas export project,change pipeline route to avoid UAE,77

Japan May spot LNG prices fall tolowest in more than 2 years, 177

Reuters Fellowship Paper, 150Reza Shah, 67, 68Rice University, 14, 17, 19, 23Richardson, Bill, former US Secretaries of

Energy, 36Ripple, Ronald D., 19, 192

The Geopolitics of Natural Gas: TheGeopolitics of Australian NaturalGas Development, 19

U.S. Natural Gas (LNG) Exports:Opportunities and Challenges, 192

River, 141Yenisey, 141

Rogers, Howard V., 10, 89, 91The Impact of Lower Gas and Oil

Prices on Global Gas and LNGMarkets, 10

The US Shale Gas Revolution and itsImpact on Qatar’s position in GasMarkets, 89

Romer, George, 48Putin’s Gas Attack: Is Russia Just in

Syria for the Pipelines?, 48Rosneft, 62, 103, 130, 171–2Rostec, 117Rouhani, Hassan, Iranian President, 72–

3, 84–6, 121visit to Turkmenistan, 121

Royal Dutch Shell Plc, 6, 17, 72, 81, 171,195

Russia, 7, 10, 12–7, 23, 29, 31, 37, 40–41,43–53, 56–9, 61–7, 69, 73–5, 79, 82, 92,95, 100, 103–4, 106, 108, 110–3, 115,117–9, 122–4, 126–34, 136–8, 141, 147,149, 151–2, 154–6, 162, 164, 171–2, 178,186–8, 198annexation of Crimea, 15, 45, 130, 154economy, 50, 106, 129energy

market, 52resources, 137strategy, 56

gas customer, 56

Index 219

major pipelines in, 46oil and gas exports, 15pipeline

network, 110politics, 112

sanctions imposed on, 104US and EU sanctions, 52

Russia and Ukraine, 118, 187gas contract, 118

Russia Beyond the Headlines (RBTH), 151Russia-China Natural Gas Pipeline, 156Russian coast, 142Russian exports, 56Russian gas, 31, 37–8, 40, 45–7, 52–3, 55–

6, 58, 63, 73–4, 123, 165, 178, 187European dependence on, 31imports of, 55

Russian military, 130Russian pipeline, 55, 64, 110, 112Russian Security Council, 129Russian State Energy Strategy, 49Russia-Ukraine conflict/dispute, 64, 111

gas transit, 111Russo-Japanese Cooperation, 131

Sabine Pass LNG Terminal, 8, 29, 41Saikia, Siddhartha P., 190

Post-crash in gas prices, India‘sPetronet to rework pricing for LNGfrom Exxon’s Gorgon project inAustralia, 190

Saran, Shyam, 142, 143Why the Arctic Ocean is important to

India, 143Saudi Arabia, 13, 16, 26, 40–41, 48, 73, 75,

88, 91, 94, 97, 101, 106Saudi Fund for Development, 177Saul, Jonathan, 85

Iran sweetens oil contracts to countersanctions and price plunge, 85

Schlumberger, 179School of Russian and Asian Studies, 63Schwartz, Laura, 49Sea of Japan, 57Second Strategic Energy Review, 2008, 111Sefcovic, Maros, European Commission

Vice-President, 121Sen, Anupama, 165

India’s ‘gas renaissance’ – Rhetoricversus Reality, 165

Sergei, Mohammed, 103, 112, 130, 134The Tiny Gulf Country With a $335

Billion Global Empire, 103Shaffer, Brenda, 73, 82

A Nuclear Deal with Iran: The Impacton Oil and Natural Gas Trends, 73,82

Shah Deniz II, 119Shale gas, 3, 5, 10, 14, 21, 23–4, 26–9, 31,

37–8, 42, 63–4, 106, 122, 149, 156, 158,164, 170, 179, 180, 191

Shale gas production, 41Shale gas revolution, 3, 8, 10, 14, 21, 29–

31, 37–8, 45, 50, 63, 73, 132, 190–91Shale reserves, 36, 38, 186Shanghai Cooperation Organisation

(SCO), 40Shanghai Oil and Gas Exchange, 194Sharma, Shardul, 95

Qatar Petroleum, Dolphin sign newgas contract, 95

Shek, Colin, 155China’s gas-import slowdown

threatens LNG producers, 155Shell, 85Shipping industry, 92Shirvani, Tara, 48, 74–5

The Dash for Gas How Iran’s GasSupply Can Change the Course ofNuclear Negotiations, 48, 74–5

Shiryaevskaya, Anna, 82–3, 190China Joins India Seeking Better LNG

Contracts for Buyers, 190Iran Seeks $100 Billion for Gas as

World Fixates on Nation’s Oil, 82, 83Shustov, Alexander, 151

Why China will remainTurkmenistan’s main gas buyer, 151

Siegel, Robert, 95How Tiny Qatar ‘Punches Above Its

Weight, 95Silk Road Fund, 104Singapore, 40, 134, 139, 193–4Singapore SGX LNG Index Group

(SLInG), 81, 193Singh, Animesh, 181


Amendments in Coal Bed MethanePolicy in works to encourage output,181

Singh, Rajesh Kumar, 195India’s Top Gas utility Seeks to Defer

Gazprom’s LNG Contract, 195Sinopec, 149, 158Sino-Russian strategic and bilateral

cooperation, 56SLOCs, 149Sofia News Agency, 46

South Stream ‘Could Be Revisited’after Bulgaria Election—HungaryFM, 46

Soldatkin, Vladimir, 51, 62, 104CPC pipeline oil exports down 7 pct

in Jan, 62Novatek eyes cooperation with QatarGas

in LNG marketing—Russian energyminister, 104

Russia’s Gazprom warns EU over gas,Ukraine, 51

South Asia, 18, 22, 113, 115–6, 118, 189South Caucasus Pipeline (SCP), 61South China Morning Post, 136, 186South China Sea (SCS), 22, 39, 159South East Asia, 8Southern Corridor Summit, 112Southern Gas Corridor, 53, 119, 122, 125,

188Southern Gas Corridor project, 119, 188South Korea, 10, 29, 33, 37, 40, 47, 56, 94,

98, 102, 115, 134, 139, 159, 185, 188, 192,194, 197

South Pars, 73–5, 77, 81–3, 86, 92, 103–5,121, 176gas field, 73, 104, 121pipeline, 121

South Stream pipeline export, 82South Stream Transport, 51Sovereignty operation, 129Soviet Union, 44, 59, 110

pipeline network, 59Spain, 74, 81Staalesen, Atle, 141

A role for India in Russian Arctic, 141Statistical Review of World Energy Markets

2015, 163

Statoil, 45, 187, 189Energy Perspectives: Long-term macro

and market outlook, 187, 189Stern, Jonathan, 52

Does the cancellation of South Streamsignal a fundamental reorientationof Russian gas export policy?, 52

Stewart, Peter, 89, 91The US Shale Gas Revolution and its

Impact on Qatar’s position in GasMarkets, 89

Strait of Malacca, 131, 142, 149, 159Straits of Hormuz, 79, 131Stratfor Global Intelligence, 43Strionski, Paul, 109

Turkmenistan at Twenty-Five: TheHigh Price of Authoritarianism, 109

Struzik, Ed, 136China signals hunger for Arctic’s

mineral riches, 136Suez Canal, 22, 33, 136Sunday Morning Herald, 160Sun, Sophia, 158

Shale Gas development in China, 158Swaraj, Sushma, India’s external affairs

minister, 117Sweden, 134–5, 138Swing Producer, 90–91, 192Swing Supplier, 89, 102, 154Switzerland, 74Syria, 48, 51, 89Tabatabai, Ariane, 86

Where does the Islamic RevolutionaryGuard Corps stand on nuclearnegotiations?, 86

Tabriz-Ankara pipeline, 73Taiwan, 10, 33, 47, 98, 149, 159, 197Tajikistan, 113, 123, 151Taliban, 89Tamil Nadu, 173, 179Tanchum, Micha’el, 117

Turkmenistan Poised for TAPIBreakthrough, 117

Taneja, Kabir, 139India Arrives at the Arctic, 139

TAPI pipeline, 113Tass, 137

Russia’s newest Novorossiysk

Index 221

icebreaker completes first Arcticvoyage, 137

Tay, Mark, 11Global LNG-Asia prices hit parity with

British gas benchmark, 11Team Norway Newsletter, 140Tehran and Moscow, 82Telegraph, The, 1

Sheikh Yamani predicts price crash asage of oil ends, 1

Telenor, 138The Oxford Princeton Programme, 2015,

7The Policy Paper Series – Transforming

Ideas Into Solutions, 32The Washington Institute, 73Third-party Access (TPA), 46, 194Times of India, 178Tobago, 166, 186Total S.A., 72, 75, 81, 85, 104, 116Trade, 6–7, 9, 11, 14, 22, 29–30, 36, 40, 56,

63, 65, 71, 76, 83, 118, 121, 123, 127, 136–8, 142, 149, 159, 191, 194, 198foreign, 118pipeline, 29US, 36

Trade Arabia Business Information, 69Iran in talks to complete LNG projects,

69Trans-Afghan Pipeline, 111, 115Trans-Anatolian Natural Gas Pipeline

project (TANAP), 74, 119Trans-Asia Gas Pipeline (TAGP), 113Trans-Caspian Pipeline (TCP), 18, 63, 113,

118–9, 122Transforming Ideas Into Solutions Prosperity

at Home and Strengthened Allies Abroad– A Global Perspective on Natural GasExports, 41

Transnational Pipeline(s), 176Trendz News Agency, 76, 119Trinidad, 166, 186Trivedi, Kamlesh, 166

Indian Spot LNG Trade: How IndianBuyers Set New Ceiling for SpotLNG Price in 2008 and EmergingTrends for 2009, 166

Trump, Donald, US President, 28, 66, 72,86

Turkey, 46, 48, 51, 53, 55, 61, 73–4, 82–3,103, 110, 115, 118–9, 121

Turkish Stream, 51, 53, 187Turkmen, 59, 109–10, 112–3, 116–9, 121–4,

177, 188–9Turkmen-China pipeline, 124Turkmengaz, 119, 151, 176Turkmenistan, 17–8, 23, 58–9, 61, 63, 77,

83, 108–13, 115–9, 121–5, 150–51, 154–5, 164, 176–8, 188Daulatabad field, 111dependent on the Soviet-era pipeline

network, 17economic growth, 108economy, 109, 124energy relations, 110exports, 115flexibility on prices, 123Galkynysh field, 116gas production, 110onshore gas extraction activities in, 113

Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, 18, 23, 61, 77,113, 115–7, 123, 164, 176–7, 189US-supported project, 77

Turkmenistan and Pakistan, 115Tuttle, Robert, 17

Qatar’s LNG dominance challenged,17

UAE, 76–7, 81, 92, 94, 102UK, 3, 7, 66, 68, 81, 97, 102–3, 123, 165, 172–

3BP Plc., 172control over Iran, 68National Balancing Point (NBP), 7, 11,

165Ukraine, 14–5, 37, 46–7, 49–53, 56–7, 64,

73, 104, 110–11, 118, 154, 187Ukraine-Crimean crisis, 53Ukraine crisis, 46, 49–50, 56, 57, 73, 187

Western-imposed sanctions over the,49

Ukraine-Russia gas crisis, 53UNCLCS, 133UN Commission on the Limits of the

Continental Shelf (UNLCS), 128UNFCC, 146


UNFCCC, 146UNIS, 140United Nations Convention on the Law

of the Sea (UNCLOS), 59, 128, 133, 135United Nations (UN), 59, 71–2, 128, 133,

150sanctions on Iran, 72

lifting of the, 72United States Geological Survey (USGS),

12, 179energy resources, 126gas and oil resource, 179recoverable oil and gas resources, 19

United States of America (USA),administration, 66, 86Central Intelligence Agency (CIA), 68economy, 26, 30EIA, 21, 34, 36, 38, 41, 81, 97, 132, 156,

159–60, 179energy

bounty, 13geopolitics, 26security, 132superpower, 13, 40, 45, 129

exports to Asia, 52, 192foreign policy, 38

impact of energy independence on,38

fracking and shale gas revolution, 14fracking technology in the, 8gas exports, 30, 32

opportunities and challenges for, 33prices, 13, 191

geopolitical leadership, 36Henry Hub (HH), 7–10, 102, 165hub-based resources, 14imposed unilateral sanctions on Iran,

71LNG exports, 37, 192market, 9, 23, 31

electricity, 30oversupply in the, 9

military security, 40natural gas

prices, 35production, 26, 29, 33

Obama administration, 35, 132–3, 142physical trading hub in the, 7

pivot Asia policy, 21policy for the Arctic, 131prices

natural gas, 23, 35pressure on, 8residential retail, 34

primary sources of oil, 26Sabine Pass facility, 8sanctions on Iran, 72, 75, 118shale gas, 21, 23, 28, 63–4, 106, 164

production, 23, 28revolution, 21, 63

sources of oil, 26strategy, 25trade, 36

Unocal-led CentGas project, 111, 115Upton, Fred, 32US Air Force, 95US and Arab allies, 25US and Saudi Arabia, 26

1945 agreement, 26, 40US Central Intelligence Agency, 68US Department of Defense, 39

Defense Budget: Priorities andChoices, 39

US Department of Energy (DoE), 26, 29,33, 46, 83, 109, 132, 156, 180, 194

US Energy Information Administration,14, 26, 46, 156Russia, 46U.S. Petroleum and Other Liquids,

Short-Term Energy Outlook, 26US energy market, 21US Environment protection Agency, 35

Assessment of the Potential Impacts ofHydraulic Fracturing for Oil andGas on Drinking Water Resources,35

US Geological Survey, 19, 126U.S. Geological Survey, Fact Sheet 2010–

3014, 12Assessment of Undiscovered Oil and

Gas Resources of the Levant BasinProvince, Eastern Mediterranean, 12

US Gulf Coast, 33U.S. House of Representatives Committee

on Energy and Commerce, 32US Institute for Peace, 71

Index 223

Iran Primer, The, 71US National Petroleum Council (NPC),

132US Navy, 21US President’s Economic Report, 30, 33,

35–6USSR, 43, 59, 62US Subcommittee on Energy and Power,

40Uzbek, 112, 151Uzbekistan, 58, 113, 123, 151

Vaez, Ali, 71Iran Sanctions: Which Way Out?” The

Iran Primer, US Institute for Peace,71

Vaida, Petrras, 45LNG terminal – guarantor of

Lithuania’s energy security, 45Vanya, Raheja, 178

ONGC exploring swap deals to importgas from Myanmar, 178

Vasánczki, LuçaZs, 109, 111Gas Exports in Turkmenistan, 109

Vietnam, 56, 159Vukmanovic, Oleg, 11, 75

Global LNG-Asia prices hit parity withBritish gas benchmark, 11

Total in talks to buy Iranian LNGproject: sources, 75

Wall, Kim, 136China seeks greater influence in Arctic

region, 136Wall Street Journal, The, 45, 98, 127, 190Warrick, John, 133

One step closer to Arctic drilling?Obama administration grants Shell‘conditional’ approval, 133

Washington Institute, 73, 81–2Washington Post, The, 17, 28

Obama Announces Plans to AchieveEnergy Independence, 28

Washington Review of Turkish and EurasianAffairs, The, 159

Washington Times, 133WBUR News, 95Wen Jiabao, Chinese Prime Minister, 135,

142

Wen, Philip, 135, 142, 160Japan finds China’s expansion in East

China Sea ‘extremely regrettable’,160

West, 8, 12, 14–6, 18, 21–2, 25–6, 31, 38–40,47–9, 62, 68, 71, 75, 101, 112, 121, 131,134, 150–51, 155, 184, 186–7, 192, 198

West Asia, 8, 12, 14, 16, 21–2, 25, 31, 38–9,75, 131, 134, 150, 186–7, 198

West-East Gas Pipeline, 150–51West-East trunk pipeline, 151Western Europe, 14, 47, 61–2White House, The, 27, 132Wing-Chu, Margaret Ng, 150

University China’s overseas OilfieldAcquisition Strategy and itsImplications, 150

World Bank, 125Europe and Central Asia, 125

Global Economic prospects: WeakInvestment in uncertain times, 125

World Energy, June 2016, 69World Energy Outlook 2011, 3–4, 163

Are we entering the Golden Age ofGas?, 3, 163

World Energy Outlook 2012, 9World Energy Outlook 2016, 1, 2

World Energy Outlook 2016 sees broadtransformations in the global energylandscape, 2

World War, First, 4World War, Second, 68Wrangel and Kotelny Islands, 134Wright, Steven, 89, 94

Qatar ‘rises above’ its region:Geopolitics and the rejection of theGCC gas market, 89

Xi Jinping, Chinese President, 22, 149Xinhua, 135Xinjiang, 79, 113, 151, 178Xi Xinping, Chinese President, 79, 145

visit to Pakistan, 79Xstrata, 97Xue Long, 136–7, 142Xuming Qian, 22

The Belt and Road Initiatives andChina’s Middle East Energy Policy,22


Yafimava, Katja, 52Does the cancellation of South Stream

signal a fundamental reorientationof Russian gas export policy?, 52

Yagoto, Yayoi, 191The Asian Quest for LNG in a

Globalising Market, 191Yamal LNG project, 64, 104, 130–31Yamal Peninsula, 64, 104, 137Yamamoto, Takuro, 191

The Asian Quest for LNG in aGlobalising Market, 191

Yamani, Sheikh Ahmed-Zaki, formerSaudi oil minister, 1

Yenikeyeff, Shamil Midkhatovich, 129The Battle for the Next Energy

Frontier: The Russian PolarExpedition and the Future of ArcticHydrocarbons, 129

Yergin, Daniel, 67The Prize: The Epic Quest for Oil,

Money & Power, 67

Zangeneh, Bijan Namdar, Iranian oilminister, 85–6

Zeebrugge Hub, 7Zhongmin, Wang, 158

China’s Elusive Shale Gas Boom, 158Zohr field, 103Zysk, Katarzyna, 130

Russia’s Arctic Strategy: ambitions andconstraints, 130

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